In our ongoing series of lending factors that affect interest rates, let’s (finally) talk about credit scores and related risk factors.
I say “finally” because to many people, the credit score is the be-all, end-all of borrowing. And it is true that credit scores and related risk factors are important, but not always in the way people think.
I look at credit scores and related two ways: in one way, they can be a gatekeeper. Lower than, say, 650-700, and many higher-quality lenders are going to turn potential borrowers away without considering anything else. This is why many people consider them super important (and they are).
But in terms of affecting the rate, we have to already assume a borrower has met this minimum threshold. So from that point, all of the other factors I’ve already discussed have approximately equal or even greater impact on the rate.
Here’s why: while your credit score is impactful, not all credit scores are created equal. Two different credit reports each with a 700 score could have very different paths to get there. Maybe one has a thick file with 20 years’ worth of history and the other has a thin three. The 20 years speaks a lot louder.
But it’s not just FICO scores. There are several other scoring systems like D&B’s PAYDEX, SBRi, Experian’s Intelliscore Plus, Equifax’s Payment Index, PayNet MasterScore v2, and even FICO SBSS for small businesses. Many lenders will also use public records (suits, liens, judgments) in not only making decisions, but helping to determine a rate.
Any or all of the preceding reports and scores are utilized by most commercial lenders on most loans. For Crest Capital, we utilize many of these in our application-only loan process (deals $150k and under).
But besides scores, what else could affect your rate? There are a few other overall factors that most lenders will look at with almost any type of loan:
- Industry Risk – Certain industries are riskier than others. For example, the restaurant industry is extremely volatile, with new openings experiencing an 80% five-year failure rate. However, over that same five-year period, the self-storage industry has a low 8% failure rate. So, all else being equal, who would you rather write a five-year loan for? And who should get a lower rate? No brainer, right? All industries have a risk factor, with the more stable ones typically getting better rates. In fact, many lenders won’t even engage with riskier industries.
- Economic forecasts – There’s always a bit of a crystal ball with lending. How is the economic forecast? Nationally? Industry-wise? Locally? These are all going to matter.
Hopefully, this blog has given you a good insight into how credit scores and other factors can affect your rate. If you want to learn a little more about Crest’s process and what we look for, check out our Equipment Financing Credit Requirements page.