While your business and you can be two different entities, your personal credit score can affect your ability to do business in a wide variety of ways. But there is one area where it will affect you the most, and that’s when trying to get financing. Most institutional lenders will look at your personal credit score first if you haven’t had the time to build your business’s credit, which could make getting capital early on very difficult.
Thankfully, there are things that you can do to circumvent these obstacles and still have a chance of getting financing for your business. In this article, we’re going to show you the exact effects of bad personal credit on a business, what you can do about it, and how you can build your personal credit as fast as possible.
Why is My Personal Credit Score So Important?
A lot of business owners assume that their personal credit score will have no effect on their business. While your business credit score and personal credit score will be calculated differently, your personal credit score still says a lot about you. Ultimately, how you treat your personal credit will be used as an indicator of how well you manage your money in general to financial institutions. After all, if you can’t manage finances in your own life, how can you expect them to believe you’ll be able to manage them in a business?
In addition, there’s really nothing else institutional lenders can go by when assessing your creditworthiness. The only way they can tell is by looking at your credit score, which is pretty much like a financial report card. It also gives them a glimpse into your character, hence why some employers will ask for access to your credit report before they hire you. Your credit report is just another factor in the balance they will use to evaluate not only your ability to repay but what kind of person you are.
Your Credit Score Doesn’t Hold the Same Weight in Every Situation
However, you should know that your personal credit score will not be as important with all lenders. For instance, angel investors or venture capitalists may not place much importance on your credit score. They may look at things like revenue, margin, viability, and even your personality and knowledge of the business first.
On the other hand, if you were thinking of getting an SBA loan, your credit score will have to be at least 680 to even apply, and other factors will be used afterward. The same goes for term loans, or what people usually think about when talking about business loans. Credit score requirements will usually be around the 680 mark as well, even though they might vary from institution to institution.
If you have steady cash flow but didn’t have time to build your credit history yet, short-term loans might be a good option for getting fast cash approval when a business requires funds in urgency. Short-term lenders will usually put more importance on business revenue over your credit score and might be more lenient. However, note that the interest on these loans is usually much higher and that you’ll have to deal with shorter repayment periods as well.
Invoice factoring is another way to get advance money for urgent expenditures, but not really for long-term financing. Invoice factoring allows you to get an advance on an invoice due in exchange for a fee. In this case, the invoice will be used as collateral for the loan, so your business won’t be as closely scrutinized as with other options.
What Can I do to Repair my Credit?
There are plenty of things everybody can do to correct their report history. The first thing is to take account of your current financial activity and commit to adopting more responsible payment habits. That could mean setting up automatic payments on your bank accounts and taking steps to fix accounts that might be delinquent.
You should also make sure that you get a copy of your credit report from all major credit reporting agencies. You are entitled to one free copy of your credit report per year from the three major credit bureaus: Experian, Equifax, and TransUnion. This will not only give you a clearer view of your accounts but help you to see if there are any errors there that could negatively affect your credit.
For instance, in some cases, an account that you paid off may not have been reported as such on your credit report. Or you may find that someone opened a credit account under your name without your permission. If that is the case, you could put a credit freeze on your account and stop any other inquiries to make sure no other demands get through. Once this is done, you can follow the dispute process and get these errors removed.
Adding new tradelines to your credit is also a great way to build or fix your credit. Tradelines is when you add any new credit account to your report. One of the easiest ways to do so is to apply for a secured credit card. A secured credit card will allow you to get approved by leaving a certain amount of money as collateral. The credit amount will usually be equivalent to the money deposited, but the issuer might decide to increase your limit if you have a good history or upgrade you to a regular credit card later on.
Fix your Credit By Buying Authorized Tradelines
Another thing you could do that a lot of people aren’t aware of is actually buying positive tradelines that will be added to your credit account without even applying for credit. Some services will allow you to pay in exchange for being put as an authorized user on someone else’s account. When you become an authorized user on someone account, the account’s activity will be reflected in your report, which will have a positive impact on your credit score. This is why it’s very important that you know what makes for a great tradeline and which one you should avoid. If you want to know how and where to buy tradelines, you can check this article to learn more.
Less than stellar personal credit can and probably will have an effect on your chances of getting financing early on as a business owner. However, with the tips we just provided, you should be able to fix your credit situation and gradually improve your creditworthiness with potential lenders.