How is your credit?
You know how important it is to have access to extra capital when you need it. Maybe you want to add some new equipment to your practice, make building renovations, or even buy the charts of a practice across town. For most practice owners, the best way to fund a big purchase is through a bank loan.
While your loan will be in the name of your practice, you will be required to provide personally guarantee that loan. This means that you should review your credit-worthiness on an annual basis. Here are three factors that lenders will look at in determining your credit-worthiness.
1 - Credit Score
Your credit score is exactly what you think it is. That magical, mystical FICO rating assigned to you by each of the three credit bureaus, Experian, Equifax and TransUnion. FICO scores are calculated by evaluating data in five categories using a weighted scale to determine a final score:
35% Payment History
30% Debt-to-Credit Ratio
15% Credit History Length
10% New Credit
10% Overall Credit Mix
Even though each bureau weights and calculates FICO scores a little differently, in general, a score around 600-669 is considered fair, 670 to 739 is good, 740 to 799 is very good and 800 to 850 is exceptional.
If you have a credit score in the fair range, getting a loan for the amount you want might be difficult. In the good range, you will probably get the loan you want, but maybe not the lowest interest rate. Borrowers in the very good to exceptional range typically get the best rates available. Checking all three credit reports annually at a free resource like freecreditreport.com can help owners uncover any irregularities.
2 - Liquidity
Liquidity is the amount of cash on hand that practice owners can easily access. For example, money in both business and personal checking/savings accounts is liquid. Monies locked in retirement accounts or tied up in real estate are not liquid.
Lenders typically want to see about 10% liquidity before approving a loan. So if you’re looking to borrow $250,000, the bank will want to see at least $25,000 in accessible cash.
Pre-planning to make sure there are enough liquid assets available is key to a smooth loan experience.. We recommend maintain a practice “emergency” fund equal to at least three months of operating costs to cover the unexpected and to provide liquidity for bank lending.
3 - Reputation
The final factor is a bit more ambiguous but no less important—especially for practice owners.
Reputation is how the company is viewed based on both positive and negative reviews from customers, clients, vendors, etc.. While there is really no set formula, banks will typically look at trends. Is there an increased trend in slow payment of obligations? Are practice owners paying down credit card balances or just paying the minimum? Is the business able to operate during stressful times or does it consistently need to take out more credit?