You’ve taken all the right steps to get your company off the ground, so why does your bank want to know about your personal finances and credit when you ask for a business loan?
Because your personal financial history offers insight into how you run your business.
Even if your company is established, ATB business advisors will still look at your personal financials to gauge how you operate because past behaviour best predicts future behaviour.
Business is personal
Business or personal, banks are looking to lend to creditworthy people and the connection between the two is strong.
Lenders will look at the five Cs of credit to determine how bankable you are:
- Character: your credit history
- Capacity: your cash flow to pay debt
- Capital: the funds you have access to (do you have a buffer to deal with gaps in cash flow?)
- Collateral: an asset you can pledge as security (repayment source) for the loan
- Conditions: the loan’s amount, purpose and interest rate
Do you have a history of fully paying your balance or late/missing payments? What’s your debt-to-income ratio? Are you investing your own assets in your business? Is your business successful? Your answers establish your track record.
How credit utilization works
Next to payment history, credit utilization—the percentage of how much revolving credit you’re using out of the amount available to you—plays a significant role in informing your credit score. It tells lenders how you manage your current debt: how likely are you to repay if they let you borrow more money? To build your reputation, it’s crucial to make payments on time.
To improve your credit utilization ratio, find ways to decrease your debt—easier said than done, but you can start by paying down what you owe (the sooner, the better), re-evaluating your monthly budget and increasing your credit limit (but only if you can afford to repay what you spend out of the new limit).
Credit utilization ratio = all revolving credit debt / all available credit limits
Financial experts say to aim for a credit utilization ratio of under 30 per cent.
A holistic approach
How can you evaluate all aspects—assets, liabilities, expenses, timeline, lifestyle, goals and market fluctuations—of your business’s financial health? Start by thinking big picture and measuring if you’re on track to hit long-term goals. Then figure out if your short-term goals align with that vision.
Next, assess your capacity by reviewing your business’s financial statements and business model. Evaluate patterns in profitability and cash flow. How will you budget for business growth?
Small business owners need to regularly monitor their:
- cash flow statement (operations, investing and financing): indicates how much cash your business has available (liquidity)
- income statement (profit and losses): indicates profitability of your business’s current operations
- balance sheet (assets, liabilities and equity): indicates cash value of the business
Other ideas for boosting your business’ financial health include diversifying revenue streams and collaborating with similar businesses.
Conclusion: Your habit history
How you operate your personal finances reflects on your business, demonstrating to lenders how reliable you are at paying debt. Bankers want to see business owners with a proven track record of creditworthiness, which means assessing your credit history, cash flow to pay debt, accessible funds in tough times, assets and risks. Before speaking with an advisor, evaluate what impression your financial habits exude.
