How Credit Scores Can Help or Hinder You From Small Business Success

Great credit can help consumers in many ways

Having a good credit score can help consumers obtain a variety of things to enhance the quality of your personal life and help you reach your goals. The advantages to having healthy credit include – mortgage approval, better interest rates, car loan/lease approval, better credit cards, lines of credit, access to student loans, and much more. One major advantage is being able to open a business, it’s crucial that new business owners maintain great personal credit scores and management skills.

Business owners can leverage great personal credit to their advantage

If you are looking to start or grow your own company, having a good credit score is imperative. This can help you land excellent financing as a new business since no new business by itself will have its own credit history. It takes time and effort to build business credit.  Without a business history and credit profile your personal credit score will drive the interest rates of a loan on a new business and will offer other vehicles to use as financial tools. Additionally, the better your personal credit score, the better pricing and interest rates you might gain on a loan for your new business. With better interest rates over the life of the loan, you can save a huge amount of money.

For example, Dave decided he was tired of the rat race and wanted to go into the real estate wholesaling and flipping business. His personal credit scores were in the high 700’s. He had some savings and a small mortgage on his present home. He knew he would be able to purchase a property since he had enough to put down on the house and gain loan approval, but he didn’t have the funds for renovation. Dave had 7 credit cards and each had a $20,000 credit limit – he could get $80,000 at 3% for 12-18 months by using offers on 4 of his credit cards. It was risky endeavor, but he had done enough research and was confident in his ability to buy a property, fix it up, and flip it in a 6-month period at the most.  After doing the math, Dave estimated $40,000 in profit if all went well and he planned to pay off the credit cards as soon as the home sold.  Without his great personal credit, he would not have been able to jump-start his business.

With this in mind, it is important to make sure you have a good credit score before applying for a new loan on a small business.

Some help credit tips for new business owners:

  • Make sure you are paying your bills on time – With our busy lifestyles, it is super easy to get behind on bill payments. What most people don’t realize, however, is that paying your bills on time is crucial to improving your credit score. Additionally, making payments after the deadline will usually cost you extra in late fees and can also stay on your credit report for up to seven years.
  • Pay your debt sooner rather than later – Revolving credit utilization is the ratio between your revolving debt balance and your revolving credit limits. Keeping you credit utilization at 10% or lower 2 months prior to applying for loans is another way you can improve your credit score. If you presently have a high debt balance, start planning now to repay it as soon as possible. This will help you secure a lower revolving credit utilization level and improve your credit score.
  • Don’t apply for additional credit cards or loans – If you are trying to receive a loan for a startup, avoid applying for new lines of credit. Every time you apply for a new line of credit, your credit report will be reviewed. Applying for a new line of credit will also shorten the average length of your credit history once the account is opened. Both the inquiry on credit and the average age of credit becoming younger can hurt your credit score.
  • Make sure your credit score is accurate – It is imperative that you check your credit score for potential errors. Even a small error could severely damage your credit score. To avoid this issue, review your credit score, making sure you purchase the FICO 3B reports since those have the lending FICO score, and meticulously search it for accuracy.  If you find an issue, make sure you speak with one of our credit experts before doing anything since many individuals wind up giving the creditor information that could cause the issue to remain longer on credit.

Keep in mind – timing is everything – If you are looking to open up a small business and you know you’ll need financing to do so, wait for the right time.  Don’t just apply for a loan because you want to start a business as soon as possible. Do some research first and make sure that your credit score is where it needs to be in order to secure favorable lending terms. If it is too low, it is important to consult with a reputable credit repair company to help you improve your credit score.

Remember: even just a few points higher on your credit score could save you thousands of dollars per year.