How will the bank decide?
When a bank decides whether or not to grant credit to a small business there are three basic paths that the bank can take. First, the bank can evaluate the credit worthiness of the business as a stand-alone entity without considering the personal assets of the owners. Second, the bank can evaluate only the owner without regard to the business model or the credit worthiness of the business at all. Third, the bank can consider both the owners and the business. In most situations involving a small business, the decision of whether or not to provide a credit card will be based almost entirely on the credit worthiness of the business owner. This is because the bank will almost certainly require a personal guaranty by the owner of the business who is applying for credit.
When a bank evaluates a business, what will it look for?
Where the bank is willing to only evaluate the business, it will normally be in a situation where the business has been operational long enough to have its own assets and clear financial records. In that instance, the bank will look at the long term obligations of the business, the credit history, the size of any outstanding debts that need to be serviced, the amount and frequency of debt financing, and the overall quality of the business. In general, the kind of business that is able to qualify as a stand-alone credit applicant is the least likely to actually need a credit card.
The Owner’s Credit Score
Where the bank is going to consider the credit worthiness of the individual owner of the business, the owner’s credit score is going to be the key determining factor. The credit score is made up of five primary components: payment history, debt amounts, length of credit history, new credit and credit mix.