Thursday, 29 September 2016

Will your bad credit score impact your business credit score?

A good personal credit score is the foundation of our financial success. It not only helps to get loan approvals at low interest rates, but also wins over the confidence of employers when they check the credit rating to gauge a person’s reliability. That is why people pay their bills diligently and keep their balances low in order to maintain a good credit rating. But does a personal credit score matter to your business as well. Does it affect the business credit score and your ability to secure business loans?  Let’s explore.
A business credit score is a number that is calculated to assess the business’s ability to handle credit obligations. It is based on the amount extended to the business by various lenders, collection information and regularity in making the payments. A high score makes the lenders feel secure about extending credit. It helps a person to negotiate for lower rent for office space, lower premiums for insurance and lower rates on loans. But it takes time to establish a business credit score, since lenders are not obligated to report the payment behaviour to the bureaus.
Every business big or small requires credit to complete its business transactions. Manufacturing firms need money to pay for raw materials and labour, months before they collect the payment from customers. Many organizations need financing so that they can pay up their invoices early and receive discounts. Without an access to bank financing they will face a serious cash crunch.
Small business owners often rely on their personal credit to meet the business lending needs. But as the business grows and the lending requirement increases it makes sense to allocate separate business funds to meet business expenses and not mix them with personal expenses. Having a separate business credit history helps to gain access to more credit than one would receive when using one’s personal credit score.
If you are looking at revenue based loans for your business then you need to have a steady cash flow. Even if your personal credit score is less than perfect, you can still qualify for this loan if you deposit a reasonable amount every month. Venture capitalists or angel investors also do not pay much attention to the personal credit score. They are more concerned about your business strategy and marketing plan. They will fund your business if they think it is profitable.
Fundamentally, a personal credit score and business credit score are independent of each other. A bad personal credit score does not mean than your business credit score will also go down. But there are times when a personal credit score is used for business lending purposes. If you are a sole proprietor running a small business then the lenders may want to run a personal credit score check and analyse your spending habits before lending you money.
If you have just started your business, then you will not have any established line of business credit. In the absence of a business credit score your personal credit score is considered by the lenders along with other factors like your industry, revenue predictions etc. to determine if they want to give money for the new business. The way you handle your own finances will give them a picture of how well you will handle the business finances. If you have a solid personal credit history you will easily get the money to fund your business. But if you have a bad credit score you may have a hard time to arrange for the necessary funds.
Hence if you are thinking of starting a new business you should look at ways to improve credit score fast. Get a copy of your credit report to check for any discrepancies in the information reported to the bureaus. Look for factors that might be bringing your score down, like a delayed payment or a high credit utilization ratio. Take measures to improve credit score fast like paying off all the pending bills and loan instalments.
Improving your personal credit score will help you in getting your new business started. It will be vital in securing funds till you establish a strong business credit history.


1 comment:

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