Starting a business is stressful enough as it is without considering how your personal credit score could affect the future of your business. Without a strong financial background when starting a business, you could be subject to unfavorable loan terms and steep interest rates. If you’re a business owner with poor credit history, a bad credit merchant account solution may be the solution for you.
Aspiring entrepreneurs should consider building credit as soon as possible before starting their business. Not only will this improve their chances of obtaining a business loan, but it could also provide more opportunity for more favorable terms and refinancing options in the future. However, there isn’t much reliable information available to understand how credit score affects your business.
In this article, we’re going to discuss all the ways that your credit score affects your business. From business loans to inventory, your personal credit score can impact your business in several ways. Keep reading below to learn more.
With the introduction of the Fair Credit Reporting Act in 1970 and the FICO Score in 1989, banks and other lenders started using a new standard to determine the creditworthiness of potential consumers. Your credit score is determined based on data collected by the three major consumer credit bureaus: Experian, Transunion, and Equifax.
Credit scores are calculated based on the following:
Payment history makes up 35% of your credit score consists of late payments, bankruptcy, charge offs, repossessions, and liens.
Amounts owed accounts for 30% of your credit score and include debt to credit limit ratio, accounts with balances, the amount owed across different accounts, and the amount paid down on installment loans.
Length of credit history refers to the average age of the accounts on your report and the age of the oldest account and accounts for 15% of your credit score.
The type of credit used makes up 10% of your credit score and demonstrates your ability to manage different types of credit.
Lastly, new credit also accounts for 10% of your credit score and refers to every new “hard” inquiry on your credit.
Now that you have an understanding of how your personal credit score is calculated let’s take a look at how it affects your business.
If you’re a new entrepreneur looking to start a business, banks or other lenders are likely going to refer to your personal credit score during the application process. If your personal credit score is low, it can affect the future of your business in several ways.
Let’s take a more detailed look:
When starting any business, you will need startup capital to give your company the best chance at success. However, a significant obstacle in getting capital from a lender is having a low credit score. Without adequate financing, it will be extremely challenging for you to purchase equipment, obtain licenses and permits, and promote your business, and may force you to resort to alternative methods for financing.
At one point or another, every business needs a business loan to cover additional costs along the way. Whether you need extra cash for payroll or other incremental expenses, it happens to every business owner. Without a good credit score, however, some financial institutions may make it difficult for you to qualify for a business loan, or reject your application for a business loan altogether.
Banks and lenders aren’t the only organizations that look at your credit score, as inventory and utility suppliers do so as well. Whether you’re looking to purchase new office space or set up utilities in your existing office, these companies will first examine your credit score. If you have a low credit score, you could find that you may have to pay larger deposits, higher taxes on materials, or simply be outright denied.
If you are able to qualify for a business loan – with a poor credit score, you could be faced with unfavorable loan terms or interest rates. With a higher credit score, you could not only be eligible for lower interest rates, but could also be eligible to receive the funding you need faster.
Additionally, with a high credit score, you could find that it’s easier to qualify for alternative methods of financing. Whether you need a business credit card or an alternative type of loan, a higher credit score could provide you with rewards and promotions that a lower credit score would not otherwise be eligible for.
So, what can you do to improve your credit? While there are no quick fixes, there are several things you can start doing today to boost your personal credit score.
While it sounds simple, it’s critical that you try to keep your credit usage around 15% of your available credit to avoid maxing out your credit utilization.
This may seem obvious to many, but it’s one of the most critical steps to improving credit. A significant portion of your credit score is determined by making on-time payments, which makes this crucial for every consumer.
Lastly, federal law requires you to have free access to your credit report once per year (per credit bureau). If you know you’ve been doing everything right and notice any problems with your credit score, filing a dispute with a credit reporting agency could improve your credit score.
If you’re a business owner with a low credit score or poor credit history, you may have trouble finding a merchant account that is willing to work with you. With High Risk Pay, you never have to worry about that, as we approve merchant accounts for ecommerce businesses with all types of financial backgrounds.
If you’re looking for new ways to help your business grow, but credit is holding you back, contact High Risk Pay today to learn more about all the benefits we can provide your organization.