If you're a business owner, it's important to understand how your credit score can impact your finances. A low credit score can make it difficult to secure financing and scale your business, so it's in your best interests to improve it as much as you can.
Let's take a closer look at the relationship between your personal credit score and your business, as well as ways to improve your score.
What is a Credit Score?
Your credit score is a measure of your financial health. It's used by lenders to determine whether or not you're a good candidate for a loan. If you have a low credit score, it may be difficult to secure the financing you need to grow your business. In fact, your personal credit score can be just as important as your business credit score when you're applying for a loan.
There are a few things that go into your credit score, including:
Your Payment History
Your payment history is one of the most important factors in your credit score. Lenders want to see that you're able to make on-time payments, and a history of late or missed payments will lower your score.
Your Utilisation Rate
Your utilisation rate is the amount of debt you have compared to your credit limit. A high utilisation rate can hurt your score, so it's important to keep your balances low.
Your Credit History
If you have a long history of credit, it can help improve your score. After all, if you have no track record, there’s no way for lenders to judge you, and so they won’t trust you. This is why it’s important to try to build up a positive credit history as early as possible.
Types of Credit
Another factor in your credit score is the mix of different types of credit you have. Having a variety of lines of credit, such as a mortgage, auto loan, and credit card, can help you build a strong track record.
How Does Your Credit Score Affect You?
Higher Loan Rates
One key way in which a poor credit score can impact your business is by causing you to pay higher interest rates on loans. The vast majority of lenders will take your personal credit score into consideration when determining the interest rate you'll pay on a loan. This means that if you have a low credit score, you may end up paying significantly more in interest over the life of the loan.
Lending Potential
A poor credit score doesn't just mean paying more interest on a loan; it can also mean you'll struggle to get a loan or credit card at all. Lenders don't want to loan money to customers who are unlikely to repay, so a low credit score can really limit your lending potential, and thus your business growth.
Higher Insurance Rates
Another way in which your credit score can affect you as a business owner is by causing you to pay higher insurance rates. Many businesses are required to carry insurance, and a low credit score can cause your rates to increase because insurance companies will see you as more of a liability.
Vendor Relationships
Your credit score can also impact your relationships with vendors. If you have a low credit score, vendors may be hesitant to do business with you or may require you to pay a higher deposit. This can make it difficult to get the supplies and materials you need to run your business.
How to Improve Your Credit Score
If you do currently have a poor credit score, it's not all doom and gloom. There are many steps you can take to improve your score and make it easier to get the financing you need to grow your business.
Some of the things you can do to improve your credit score include:
Pay Your Bills on Time
One of the best things you can do to improve your credit score is simply to pay your bills on time. This includes both personal and business bills.
Keep Your Balances Low
Another way to improve your credit score is to keep your balances low. This means not maxing out your credit cards or taking on more debt than you can handle. You should also pay off any outstanding debt as soon as possible and clear as much of your credit card balance as possible each month.
Build a Credit History
It’s important to prove that you are a responsible borrower who knows how to manage credit. Therefore, you need to actually use credit in order to start building a credit history. Don’t be afraid to charge bills to credit cards or borrow money; just make sure that you are able to pay it back and prove that you are fiscally responsible.
Simple steps such as using a credit card to pay your household bills and rent can help you to build a better score.
It’s a good idea to set up automatic card payments to ensure that your bills are always paid on time, and your balances are cleared each month.
Summary
A poor credit score can have a significant impact on your business, causing you to pay more interest on loans, struggle to get financing, and pay higher insurance rates.
However, there are many things you can do to improve your credit score if it is currently low. By paying your bills on time and keeping your balances low, you can work to build up a positive credit history and improve your score.
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