How personal credit affects small business borrowing
Unlike the CEOs of major public company whose personal financial situation has little effect on their companies’ borrowing, if you are a small business owner, your personal credit is a major factor influencing your company’s access to capital. The power of personal credit scores to predict small business loan repayment, the legal structure of many small businesses, and small business owners’ use of personal guarantees and personal borrowing to finance business operations all link small business owners’ personal credit to their companies’ access to capital.
Many, if not most, lenders will look at your personal credit score if you are a small business owner seeking a loan for your company. A 2006 report written for the U.S. Small Business Administration found (http://archive.sba.gov/advo/research/rs283tot.pdf) that 71 percent of banks used small business owner credit scores when underwriting small business loans.
The use of the owners’ personal credit scores makes sense. As Federal Reserve Bank of Atlanta researchers explain (h...
A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho...
The problem to be investigated is the ethics and effects of subprime loans on the financial institutions, borrowers and stakeholders. The subprime market was created to provide borrowers with a FICO score below 570 access to home loans. Inopportunely these loans were a major financial risk as most of the borrowers did not have the long-term income to pay for the high interest rate loans. (Jennings, 2012)
Countrywide’s ambition to help more Americans take part in the “American dream” of homeownership was a noble gesture. However, as noble as the goal was Countrywide failed to protect themselves and the same people they desired to help. The demographic of borrowers Countrywide marketed to were specific: low-income and minorities. Countrywide saw a need and a wide open opportunity to make money, however, they also took a large risk with offering loans to borrowers that would not have met the standards for a “traditional” loan. At first the borrowers were able to keep up with their loan payments (the economy was stable and the job market was solid).
In December 2007, the U.S. entered the third longest recession in its history. According to Britannica, the crisis in the American housing market eventually caused the entire economy to collapse. Mortgage dealers issued mortgages to unqualified families with unfavorable terms (Havermann, n.d.). Companies like Moody’s came into the picture when it was time to rate these mortgage-backed securities. If housing prices continued to rise,
When trying to obtain a small business loan you are going to want to do your research first. The best place I feel that will be willing to work with you the easiest is the place you bank with. The next step would be to fill out the loan application for the lender to review the application for credit score and history. The lenders will most likely analyze the financial ratios of your business and check to see what collateral and equity you have. All this will be to determine whether you have the ability to repay the loan. After the review is complete the lender will make one of two decisions, approve it or turn it down.
Mullard, M. (2012). The Credit Rating Agencies and Their Contribution to the Financial Crisis. The Political Quarterly, 83, 77-95
The implications of these findings are as follows. The works of these academics highlight the important point that there is higher volatility of capital charges for better quality credits (Goodhart & Taylor, 2004). This is because these credits face a steeper risk curve, as the movement within the ratings scale (from one rating to another) is much greater.
...iced prices of 6 to 20%. But, in the end, it is difficult to make up one's mind on the advantages of this system. At no time was a credit score spoken of. The credit score is a figure that sums up the risk of lending. The competing interest rates cannot be compared if they don't refer to the exact same risk.
Perry, V. G. (2008). Giving Credit where credit is due: the psychology of credit ratings. Journal
The mortgage and banking industries have always been very competitive. (In York County alone, there are 275 banking and lending institutions.) The historically low intere...
As most lenders are aware, cash flow also presents the most troubling problem for small businesses, and they will typically require both historic and projected cash flow statements.
The national credit manager identified the need for change and the centralization of the credit function was approv...
Access to capital and credit at various stages in the business life cycle is identified as the major hurdle by the entrepreneurs. For many small firms and most start-ups, the personal funds of the business owners and entrepreneur and those of relatives and acquaintances constitute as the major source of capital. For many small businesses, especially during the early years of their operation, credit is simply not available. For many others, the limited available credit is not through bank loans. Due to this many of them rely on multiple credit card balances and home equity loans as major sources of credit for start-up firm. Because banks are bound by laws and regulations to prudent lending standards that require them a risk management assessment for each loan made. These regulations were made more vigor during the late 1980'' and early 1990 . Banks always found that lending to manufacturing firm with hard asset such as property, equipment, and inventory has always been easier than lending to today's expanding service sector firms. Because the service sector firms own few hard asses, therefor lending judgment have to be based in terms of character, markets, and cashflow, which make it difficult to the bank to meet the regulations for the approval of the loan. Additional, the banking industry, as well as the entire financial sector of the
After a decade or two of being a CPA, who specializes in personal finance planning, I plan to open my own business. In order to open a business, I would need a startup loan; I would use a part of the savings I acquired over my career but it would be easier to have a supplement to that money. Because according to Small Business Administration, a business can require $30,000 or more to start up, and even if that is in my savings that is a large amount to risk(SBA). And having a stable job, with an above average salary appeals to banks when applying for loans, because banks look for reliable borrowers who have assets and creditability involving paying. Also with a career specialization in personal financial planning, I show my creditworthiness of being able to handle a business that is focused about personal finance crises. Furthermore, being a CPA demonstrates my knowledge of business and keeping books thusly presenting me as a viable candidate for a startup loan. Therefore, I plan to borrow a loan for half the amount I need to start up my
Smaller companies are much more likely to obtain an attentive audience with a commercial loan officer after the start-up phase has been completed. In determining whether to extend debt financing--essentially, make a loan--bankers look first at general credit rating, collateral and your ability to repay. Bankers also closely examine the nature of your business, your management team, competition, industry trends and the way you plan to use the proceeds. A well-drafted loan proposal and business plan will go a long way in demonstrating your company's creditworthiness to the prospective lender.