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...
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
The marketplace can be unpredictable, as shown in the 2008 financial crisis. Since 2008 keeping track of one’s own financial means has become increasingly important. Equifax’s goal is to meet the needs of individuals and businesses by providing them with applicable data thereby allowing them to make well informed business decisions. The more organizations and individuals are informed and updated the less of a chance for financial disruptions.
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 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.
In terms of looking at how credit rating agencies affected the market as a whole, they played a role within the mortgage crisis as they gave way to a real estate credit bubble. The mortgage crisis seems to have b...
Perry, V. G. (2008). Giving Credit where credit is due: the psychology of credit ratings. Journal
Mortgage loans are a substantial form of revenue for the financial industry. Mortgage loans generate billions of dollars in the financial industry. It is no secret that companies have the ability to make a lot of money by offering a variety of mortgage loan products. The problem was not mortgage loans but that mortgage companies were using unethical behavior to get consumer mortgage loans approved. Unfortunately, the Countrywide Financial case was not an isolated case. Many top name mortgage companies have been guilty of unethical behavior. Just as the American housing market was starting to recover from its worst battering since the Great Depression, a new scandal, an epidemic of flawed or fraudulent mortgage documents, threatens to send not just the housing market but the entire economy back into a tailspin (Nation, 2010).
Adelman, P. J., & Marks, A. M. (2010). Entrepreneurial finance. (5 ed.). Bedford, Texas: Prentice Hall.
Although small businesses do not make a lot of major deals with large investors, most small businesses create profit revenue greater than large corporations. Small business creators are very brave considering only ten percent of small businesses survive. Unfortunately, some communities do not support local small businesses; they only support the large brand name and force small businesses to die out. Since small businesses will not have a name brand known around the world, many people from communities will not support them because they are not known on a national scale. “This, in turn will affect the local economy and drive capital out of their local economy. On average, for every one hundred dollars spent in an economy, if spent on a
decided to start up a shop would need finance at first to just buy the
Looking at those figures we can mention that according to Journal of Small Business and Enterprise Development (2003), small firms have a limited access to external financ...
The national credit manager identified the need for change and the centralization of the credit function was approv...
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
Starting a small business is often one of the hardest things a person can do. Some people start a business out of pure fascination, or even as a hobby. Whether starting a business for personal reasons or simply the grandeur to make loads of money, everybody needs to have a plan. Starting a small business is no easy task and can take days if not months to prepare. The most important aspect to have is the tempura and heart to start a small business, as without passion, no business can succeed. One has to be his or her own boss, make dream, reality and be willing to market and sell a product. It takes a lot of discipline, long hours and hard work, something many do not have. However with the right willingness, passion and dedication a business can be the start of something big.
Personal savings is probably the easiest source of finance, it is the owners own savings that can be used to finance the business. It has the advantage of being quickly available and bears no interest. But it can als...