This Article was written exclusively for ForConstructionPros by small business loan provider Balboa Capital.
When business owners need to apply for equipment financing, there are a number of qualifications that an equipment financing company will look for. One of the most important factors in determining one’s financing options is their credit score. Scores typically range from 300 to 850, with 700 and higher being considered as the most creditworthy. When financing companies make lending decisions, credit scores play a role in whether a loan will be approved, how long the term will be and what the interest rate will be. So, having a strong credit score can certainly open more doors and yield many benefits for your construction business.
Checking up on your credit score
If you’re looking to lease construction equipment or obtain a business loan, you should regularly evaluate your credit score. Each time you check your credit, you should make sure there are no discrepancies and determine that your payment history is accurate. If you simply want to get an idea of how your credit profile stands, there are two types of credit inquiries to know about. The first is a soft inquiry, which allows you to review your credit score without it being lowered. Common forms of soft inquiries include background checks done by yourself or potential employers and credit checks by companies to provide pre-approved credit cards and loan offers. None of the above will hurt your credit score and can be conducted as many times as you like.
When you apply for a construction equipment leasing program or business loan, lenders will generally conduct a hard inquiry, which can slightly lower your credit score for several months. Try to avoid hard inquiries unless absolutely necessary, as too many can add up and make a significant impact on your credit score.
The role of credit with equipment leasing programs
When dealing with large construction equipment purchases or business loans, there is always a financial risk involved. Your credit provides assurance that any debt you accrue will be repaid in full and on a timely manner. While financing companies can provide equipment leasing options based off of credit scores and recent financial statements, traditional banks and credit unions typically require down payments. Independently-owned equipment leasing companies, such as Balboa Capital, typically do not require any form of collateral for their construction equipment financing programs, so your credit score is weighed much more heavily.
Keeping your credit score high
It’s not enough to simply have a high credit score; you also have to maintain it and ensure it doesn’t drop. And there are several ways of maintaining a good credit score, including reducing debt when possible, keeping your balances low and limiting your credit applications. Also, lease payments should always be made on time. For example, if you acquired a piece of heavy machinery with a credit score of 670 and you make a few payments 30 days late, your credit score may see a drop of 140 points or more. With a low credit score, acquiring another piece of equipment can be difficult, and your loan might get rejected. While the above strategies offer no guarantee, they have been proven to be generally successful.
Repairing a low credit score
There are several methods for construction business owners to improve their credit. These methods include getting a new credit card (for those who do not have one), using credit cards sparingly and disputing any discrepancies. It’s important to regularly monitor your credit report so that any issues can be corrected in a timely manner. Again, all outstanding payments and debts should be cleared as soon as possible.
Having a strong credit profile can make a significant difference on your construction company’s immediate and long-term future. It provides you with more equipment financing and business loan options and, not to mention, possibly receiving lower interest rates.