We all know that bad credit scores can wreak havoc with our personal finances, leading to higher interest rates on mortgages, car loans, and much more. But despite the fact that business credit and personal credit are separate scores, many first-time entrepreneurs still make the critical mistake of thinking that personal credit won’t affect their businesses.
Why Personal Credit Matters for Business Owners
In reality, the exact opposite is often true. If you’re an entrepreneur with little traction or proven business expertise, it’s likely that banks will weigh your personal credit history as you go through the application process. After all, if the past precedent, what better way to assess your risk as a borrower than by looking at your personal credit score, especially if you don’t yet have a business credit score.
Poor business (and personal) credit scores can lead to a number of problems: rejection of loan applications (or high interest rates if you are approved), an inability to acquire inventory or upgrades, and worst of all, the possibility that you won’t be able to get your business off the ground.
Let’s take a look at each problem in more detail:
Problems with loans
In the United States, personal credit scores range from 300–850. If your credit score isn’t good enough, you may be rejected outright for a business loan.
Still, since banks have really cut back on their small business loans (compared to a decade ago), applying for a loan from a traditional lender may be an uphill struggle for someone with poor credit. As a result, you may wish to turn to alternative lenders.
The downside, however, is that alternative lenders can charge high-interest rates, at least compared to banks or lenders participating in the various loan programs backed by government agencies like the SBA.
Remember that a small business loan is like any other investment. You have to weigh your risks and rewards. So does the lender, who doesn’t know for sure whether you’ll be able to recoup their capital, particularly if you default. This is why lenders charge interest, which serves as both a fee for their services and as a measurement of the risk that you, the borrower, poses. If a lender perceives you to be a higher risk investment, then they will raise their interest rates accordingly.
Inventory, supply, and utility problems
It’s not just lenders who look at your credit score. In fact, a number of providers will also examine your credit score when they assess how they will charge you.
For instance, utilities will look at your credit score when you request services. They may even ask clients with bad credit to pay an additional deposit. The same goes for real estate companies, which run the very real risk of having clients pull out of leases early or defaulting on scheduled rent and maintenance payments.
Additionally, distributors may also be wary of doing business with you, especially those that sell inventory and raw material either in installments (due to the high cost) or on credit. As a result, they may charge you more than other entrepreneurs with better credit, or simply deny you outright.
You might not be able to start your business
Ultimately, a lack of capital can prove to be fatal to your entrepreneurial vision. One of the biggest obstacles facing any fledgling business is getting enough capital to fund startup costs, such as insurance, licensing and permits, equipment and supplies, advertising and marketing, payroll, and much more.
Without adequate financing, it can be extremely difficult to get your business off the ground. True, you can always try unconventional routes, be it bootstrapping your business with your personal finances, turning to friends and family, or crowdfunding your business with a platform like Kickstarter or Indiegogo. But each of these options comes with its own set of hurdles.
Bad credit is called “bad” for a reason
When it comes down to it, bad credit makes it harder for you to realize your entrepreneurial dreams. Bad personal credit can often lead to rejected loan applications, high-interest rates, and problems with inventory, space, and utilities. It can even force you to abandon your business idea before it gets off the ground.
That’s why it’s in your best interest to improve your personal credit score as much as possible before you strike out on your own as an entrepreneur.
The post How Bad Credit Can Affect Your Business appeared first on AllBusiness.com
The post How Bad Credit Can Affect Your Business appeared first on AllBusiness.com. Click for more information about Meredith Wood.
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