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Your credit score is calculated by credit bureaus, such as Experian, Equifax, and TransUnion, to determine your likelihood to repay debt. Lenders and credit card companies use this score to make a decision as to whether or not they’ll extend credit to you. In other words, your credit score matters when you want to borrow money personally or to operate or grow your business.
It’s likely that you use credit to purchase many things in your personal life. You might have credit card debt, a car loan, student loans, or a mortgage. All of these types of debt and more factor into your credit score. If your score is over 680, it’s considered to be “prime,” which means you’ll likely qualify for better loan terms when a creditor does approve your financing request. The lower your credit score is, the less likely you are to qualify for loans and the worse the terms will be on loans you qualify for.
For these reasons, it’s very important that you manage your debt and keep your credit score as high as possible. If you’re a small business owner, there’s another very big reason why your credit score matters to you. For many small business owners, obtaining a loan, credit card, or other forms of financing for the business can be very difficult if the business doesn’t have a credit history yet.
Whether a business is new or established, if the business owner hasn’t taken steps to develop a credit history for the business, then lenders are unlikely to extend credit to it. That’s because the lenders have no way of determining if the business can repay the debt or not.
Even if your business makes a lot of money, that income doesn’t guarantee to a lender that you won’t spend that money on other things without repaying your debt. The lender needs to know that you have a history of credit repayment and that you’re responsible with the money you borrow.
Without established business credit, a small business owner has to rely on her own credit score and credit history to secure financing. Similarly, if a business owner is a sole proprietor where the business and owner aren’t separated for tax and banking purposes, the business owner’s personal credit score will be used in a lender’s decision-making process regardless of the age of the business.
What if Your Credit is Poor?
If your credit score is low, all hope isn’t lost for securing financing for your business. There are credit repair services that can help you improve your credit score. You could also look into alternative funding sources such as crowdfunding.
The key to developing and maintaining a good credit score that enables you to operate and scale your business in the future is to get copies of your credit reports from each of the credit unions and look for any problems. Are there old accounts you don’t use that you can close? Are there accounts that you can pay off and remove from your credit report? Are there mistakes that need to be corrected?
Once your credit report is cleaned up, work to improve your credit score by always paying off your debts on time. Any payment submitted more than 30 days after the due date could be reported to a credit bureau and could negatively affect your credit score. Be sure to check your credit report at least once per year so you can address any problems quickly.
Your credit matters to your small business, so start monitoring and improving it as soon as possible.
Susan Gunelius
Susan Gunelius is the Founder and Editor-in-Chief of Women on Business. She is a 30-year veteran of the marketing field and has authored a dozen books about marketing, branding, and social media, including the highly popular Ultimate Guide to Email Marketing, 30-Minute Social Media Marketing, Content Marketing for Dummies, Blogging All-in-One for Dummies and Kick-ass Copywriting in 10 Easy Steps. Susan’s marketing-related content can be found on Entrepreneur.com, Forbes.com, MSNBC.com, BusinessWeek.com, and more. Susan is President & CEO of KeySplash Creative, Inc., a marketing communications company. She has worked in corporate marketing roles and through client relationships with AT&T, HSBC, Citibank, Intuit, The New York Times, Cox Communications, and many more large and small companies around the world. Susan also speaks about marketing, branding and social media at events around the world and is frequently interviewed by television, online, radio, and print media organizations about these topics. She holds an MBA in Management and Strategy and a Bachelor of Science degree in Marketing and is a Certified Professional Career Coach (CPCC).
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