NotAnyoneYouKnow
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Suzanne:
Good luck with your business plan! Now let's take a look at your question.
Regardless of whether you're looking to borrow money to start a business, buy a house, or pay off credit card debts, the underlying principle is always the same - first and foremost, the lender's decision will be determined by the likelihood that you will be able to pay back the money that you've borrowed.
Keep in mind something very important about lenders - they're not lending their own money. A lender is in the business of lending you other people's money - the real lenders are the investors. The investors deposit funds with the banks, and say to them "here, take this money and manage it for me. Lend it to some other people, charge them interest, and use it in ways that will make me even more money."
The banks have a responsibility to the investors to manage their money wisely. Wisely, in this case, means lending it to people who are sure to pay it back. The problem is that the bank can never KNOW that a particular debtor will actually pay them back.
Trust me, however, the banks don't just go around hoping and praying.
Every time a bank is asked to make a lending decision, they very carefully analyze who is borrowing the money, and what it's going to be used for. If the borrower already has a poor record of paying loans back, or if the borrower has a history that shows difficulty managing debts (for most people this means credit cards, car payments, student loans, etc), the bank has some pretty strong evidence that the borrower is not a good person to lend money to. Your past record with loans and debts is what your "credit score" measures. People get caught up worrying about their "score", but the score is just a shortcut summary of a more complex record of debt management. Lenders look at the scores, but they also look beyond the scores to see specific things about your debt management.
Is your score what it is because your debt is dangerously high relative to your income, is your score influenced by high balances on credit cards, is your score forced downward by late payments, write-offs, or bankruptcy? Or maybe your score is just a tad low because you've recently been doing some refinancing? Some of these things are more of a red flag to a lender than others.
But forget about your credit score for a moment. You're approaching a lender for funds to start a business. Surely, then, the likelihood that you'll pay the lender back are very much tied into the success of your business. If your boutique takes off and becomes the local new mothers' hot spot, you'll have plenty of funds to pay your loans on time. If your boutique struggles in its early days, and you're left with lots of unsellable inventory, and your rent payments are too high, and your location isn't so good, and your cashier walks out the door with half the money in your cashbox, well, you're not going to be in good shape to pay that loan!
That's why any lender who is considering a business loan wants to see your business plan. They want to know what kind of business you're going to run, where it's going to be located, whether you've done your homework to insure that you're filling a necessary niche in the community, whether you have experience running this type of business, and know something about how to run it successfully, where you're going to be getting your merchandise from, and whether you're getting a good price for it, how much your rent is going to be...and on and on and on.
But you see why, don't you? The lender MUST do its very best to lend money only to people (or businesses) who really are going to pay them back. On time. With interest. Every month.
If you're thinking about opening a new business, you should definitely read everything you can about starting out. Most businesses fail almost immediately, because they're undercapitalized. The startup costs are high, and the initial income stream is low - that means you must have the personal resources to survive for several months with a lot less income than "outgo". (And continue to pay your rent, your suppliers, your employees, your electric bill, your loan, your advertising, etc.)
There are many organizations that offer free assistance to new business owners. Definitely look around and see what's available in your community. One very well known organization is SCORE, which has been around since 1964. They call themselves "Counselors to America's Small Businesses", and they work closely with the government's Small Business Administration to assist business owners. Their services are free, and these people know their stuff. You can even get expert advice right from your computer through their "Ask SCORE" and "Learn Online" features.
Good luck to you. Small businesses are the backbone of the American economy, and there's no reason that your business can't be another amazing success story. Your credit score is a small part of what will determine all of this, so take the time to lay the groundwork for success methodically.
I really hope this helped. |
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