4 Reasons to Delay Applying for a Loan If You Have Poor Credit
In this post, we’ll list some of the risks involved in applying for a loan with a bad business credit score. Although having a business loan can be beneficial, you should recognize the risks of applying for one with a low credit score and consider delaying your application until your business is in a better financial standing.
1. Your Credit Score Might Be Lowered Even Further
The best way to improve your business’ credit score is to pay all outstanding debts as quickly as possible. Applying for an additional loan will inevitably increase the difficulty of clearing your current debts and it could take significantly longer to improve your credit score.
If receiving another loan causes you to miss payments on already outstanding debts, your business’ credit score will continue to drop. This means that in the future, securing outside funding will be challenging. At best, a bad credit business loan can be a temporary solution to your current cash flow issues. At worse, it can result in a lower credit score and may result in financial insolvency.
2. You Might Not Even Qualify for a Traditional Loan
There are two types of credit inquiries; soft credit checks will allow you to understand your current credit situation and won’t affect your credit scores, while hard credit checks are done by outside entities that you’re considering borrowing from. Therefore, having too many hard credit checks can have a negative impact on your credit score.
Since a hard credit check can affect your lendability, you shouldn’t apply for an excessive number of loans to weigh your options. Before applying for a loan, you should research the credit qualifications, interest rates, and other important details. If you believe that you won’t qualify, then you should delay your application until your business has a better credit score.
3. Your Debt to Income Ratio Could Suffer
One of the most important financial metrics to monitor when running a business is your debt to income ratio. Naturally, financially solvent businesses will eventually have more income than they do outstanding debts. Although going into debt can make sense in some situations, if you already have a bad business credit score, you should avoid worsening your ratio.
As your debt to income ratio declines, your business will likely experience lower profit margins, increased monthly expenses (due to interest), and increased difficulties establishing a competitive advantage. Once again, it’s important to note that any relief provided by a loan may only be temporary. If your credit situation is already overextended, the marginal benefits of an additional loan will be less.
4. Your Business Will Need Even More Revenue to Earn a Profit
The primary purpose of running a business is to earn a profit. Because your net income will be determined by your revenues minus your expenses, the only ways to improve your bottom line are by increasing revenues or decreasing expenses. If your business already has a bad credit situation, an additional loan probably won’t increase your revenue by enough to make it financially justifiable.
In addition, with each new loan that you receive, you’ll have to set more money aside each month to pay for your interest expenses. Borrowing from the future to provide temporary relief in the status quo is something that’s inherently risky, so you should consider the consequences prior to using a loan.
If your business is currently facing financial difficulties, applying for an additional loan could help you make necessary investments in your company. However, if you have a bad credit score, you’ll need to consider the impact that a loan could have on your existing score. Having a low credit score can be extremely detrimental to your business’s future, so it’s best to focus on boosting your score prior to applying. Your future self will thank you!
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