Borrower Credit

Any time that anyone lends money to another person or entity, there lies the risk that they will not get paid back. It happens all the time, and now more than ever. It’s called defaulting on your loan (or lease) when you can no longer pay back the lender according to the terms originally agreed upon.  Lenders tend to not lend to individuals and businesses they believe will have a high probability of defaulting on their loan. But unfortunately, not everyone has a perfect credit history.

For those of us with blemishes on our credit, there is an alternative. That alternative is paying a higher interest rate than those who are considered to be a “better” credit. Let’s take a second to look at this from the lenders standpoint. Most of us are familiar with the risk vs. reward idea (if you are an entrepreneur, you probably understand this better than anyone). The main point behind this idea is that if a risk is going to be taken, the reward should be adequate enough to warrant taking such a risk. It works on a sliding scale, the higher the risk, the higher reward. For lenders, this idea is fairly cut and dry. Each borrower will be assigned a risk score, which is comprised of the following for small businesses in no particular order:

• Time in Business (2 years + is recommended)
• Profitability (on a consistent basis)
• Debt Ratios (the less debt the better)
• Paydex Score (This measures how well you pay back vendors)
• Liquidity (The more money you have in the bank, the better)
• Strong Personal Guarantors (This includes FICO scores, criminal history, and personal net worth)

A business that has high marks on all of these criteria will be considered a lower risk and therefore the lender will charge a lower interest rate. The reason, the lender does not need a high return on a low risk customer. And of course vice-versa. If a customer wants a loan, but they have a previous bankruptcy and their business has only been around for a year or so, if they get a loan they can expect to pay a high interest rate. The likelihood of them defaulting is much higher. Higher risk =  Higher rate.

So when you are shopping around for interest rates for your next equipment loan or lease, be honest with yourself. Are you a high risk or a low risk? By knowing this, you can negotiate appropriately.