We live in a society wherein being in debt is the norm. Just look at how our credit cards have become as prominent as cash in our wallets. For some people, if you want to have something done, you need to borrow money to be able to afford it. We would rather acquire something now and pay for it later instead of just waiting to save up for it.
When it comes to a business, that line of thinking becomes logical. If you want to improve your finances for a better way of living, starting your own business is sometimes the way to do it. After all, the profits from your business may be able to pay for your debts. But if you want to start a business, you need to make sure your current financial situation will allow you to do it. And when we talk about your financial situation, it means taking a good look at your current credit situation by looking at your credit report.
If your credit situation is not appealing, that might keep you from becoming an entrepreneur. Take for instance the start up story of Sir Richard Branson, noted businessman and investor. According to an article published on , when Sir Richard started Virgin Records (now Virgin Group), he has a lot of the characteristics of a great businessman – except for excellent credit. This resulted in him borrowing from his savings and his relatives just to fund his start up business. Thankfully, he had other sources of funding for his new business.
What if you do not have that option? Will you just let go of your entrepreneur dreams? Or will you do something about your credit report so you can finance your dream business?
Your credit score will matter when you start a small business
Obviously, the answer to this is to make sure you credit score is in top shape so you can use it to take your financial life to the next level. You need to work on your creditworthiness because it can affect your start up in three ways.
When getting a business loan
It is very rare that someone has the cash to use for their start up business. This is why a business loan is usually needed by new entrepreneurs. According to an article from Entrepreneur.com, 25% of early-stage entrepreneurs use bank financing and credit cards to help with their funding needs. When it comes to credit from banks, they will most certainly take a look at your personal credit score. Since you are after a start up business, you do not have a business credit score yet. That mean the credit institutions will still rely on your personal credit reputation to see if you are worthy of getting a business loan.
Of course, there are other sources of funding like those from the US Small Business Administration or SBA. Their website, SBA.gov, holds information that you can use to find the right federal loan for your start up company. But while they offer loan programs, you need to know that the interest that they will impose on you will still depend on your credit score – if you qualify at all. If you have a bad score, then you will be given a high interest on your loan.
When getting partners or suppliers
Another thing that you need to be concerned about is acquiring business partners or suppliers. Unless you business will be purely reliant on your own skill, you will need suppliers. The bigger your dreams are for a company, the more likely you will need partners or suppliers. Given that, guess what they will look at before they get into an agreement with you? That’s right – your credit report. If you have a bad credit record, suppliers will hesitate to give you flexible payment terms. Your bad credit score may not keep them from supplying you with your needs, but they might be a bit strict when it comes to payment. With a good credit record, some suppliers allow businesses to pay after 90 days or even more. Since a bad credit record usually means you do not have good payment behavior, they will most likely give you a hard time getting favorable terms.
When bidding for clients
The last thing that can be ruined by a bad credit report is getting clients. When you are bidding for an account with a big client, they will most likely look at your credit score to see your financial reputation. Someone who fails to meet payment on time or have a lot of debt is not really someone that you want to go into business with. Do not give that impression to your clients. You need to appear clean to them so put your credit records in order. These clients will be responsible for giving you hefty profits. Make sure they will not be turned off by your past credit behavior.
Credit management tips to improve your credit records
Thankfully, there are ways for you to improve or fix your credit score. You just have to be committed to cleaning your act because proper credit behavior may involve breaking some of your financial habits. Here are some tips when you need to improve your credit records.
- Use credit wisely. We are not saying that you should not use debt. In fact, having a credit report means you need to continually use credit. The thing is, you need to use debt wisely. Do not borrow just for the sake of borrowing. You need to know why you are borrowing money and use it as intended.
- Pay your bills on time. Your payment behavior is 35% of your credit score – at least, this is true if you are using the FICO score. This score is used the most by creditors and lenders. While there are other formulas to compute your credit score, all of them place a huge importance to how you pay your bills. So pay off your dues in time and you can watch your credit report improve.
- Keep your debt levels low. This is connected to borrowing wisely. If you know that you have a lot of debts already, try to keep a lid on your credit spending. Use cash or lower your overhead expenses so you can send bigger payments towards your debt accounts.
- Monitor your credit report. Lastly, you want to make sure that you will be monitoring your credit report every now and then. Your personal credit records can become a victim of identity theft. This can ruin your score – especially if someone borrowed under your name and it remained unpaid for a long time. When you look at your credit report often, you can see if an unauthorized financial transaction happened. You can counter that immediately. Even if you start building your business credit records, you still have to monitor it carefully. According to Fundtastic.com, business credit reports have a higher chance of having errors. That is because some businesses have similar names and if your record was pulled out incorrectly, that can result in a wrong entry. You need to make the necessary corrections immediately to avoid problems in the future.
Starting your own business is a great journey to start. Just make sure that your credit report is ready to support you and open the best financial opportunities.