By Mike Hicks, Plumas Bank
No one has the ability to see the future with total accuracy. But as a lending officer in a community bank, there is one tool that can offer a pretty reliable look at the future of a credit relationship with a businessperson who’s applying for a loan – a credit report.
Your credit history is so vitally important to the future of your business that you should do everything you can to keep current on all your business and personal loans — even in these particularly challenging times.
A credit report provides a snapshot of the applicant’s history as a borrower, either personally or as the owner of a business. If you’re 30 days late on a payment — whether it’s your car loan or that loan you took out for a new piece of equipment at your business — the effects can linger on your credit history for up to seven years. Don’t underestimate the effect of your credit history on your ability to borrow money to launch a new business or expand a successful existing business in the future.
It may sound simplistic, but a lender’s first concern is the ability of the borrower to pay the money back after the bank approves a loan.
That’s why we ask borrowers about the sources of income they’ll use to repay the loan, their savings or other capital they have available in case the income dries up, and the collateral they can provide to the bank in case the borrower faces major repayment challenges.
Just as important as those financial questions is the borrower’s character – meaning actions that show integrity and good standing when it comes to contractual obligations. Do they have a history of paying bills on time? Have they shown that once they enter into a contract, they know it’s important to pay it back?
As bankers, a credit history — the story of a borrower’s past behavior in contractual relationships with financial institutions or other lenders — provides a pretty good reading of the borrower’s initial financial character.
If you’re dreaming of someday launching or expanding your business, the close look that a banker is going to take at your credit history means you should be working now to build and maintain a good credit reputation.
If you don’t have much history as a borrower, you may need a co-signer when you borrow money for a car or some other good purpose. That’s OK. When you make payments on time, you are building a credit history. As you continue to borrow and pay back responsibly, you are building a credit reputation that will dramatically improve your chances to borrow money in the future.
If you dream of owning a business, don’t let bills get past due. If you think they are close to becoming past due after 30 days, do everything you can — even borrowing money from your parents or friends if necessary — to pay your bills within 29 days.
It’s equally important for owners of existing businesses to handle their personal finances responsibly. Overdue payments to your personal credit-card company today may hamstring your company’s ability to borrow money to take advantage of a profitable opportunity a couple of years from now.
Especially during the current and unpredictable environment, borrowers are facing debt that threatens to overwhelm them. A relationship with a community banker — not a bank, but a real, live banker — can prove invaluable when difficult times threaten the credit history of a business and its owners. Community bankers are your partners to help you succeed. If you nurture that relationship, your banker will have a better understanding of your business to be able to help you protect your reputation and your credit rating even when times are tough.
Mike Hix is Senior Vice President and Commercial Loan Officer, Plumas Bank (serving Reno and the Lake Tahoe region)