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Can Your Personal Credit Score Affect Your Small Business?
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As a small business owner looking for startup funding, you’ll generally have more borrowing options — at lower interest rates — with a strong personal credit score.
But your personal financial history doesn’t have to keep you from starting or growing a business. Here’s how your credit score will, and won’t, help make your entrepreneurship dreams a reality.
3 ways personal credit can affect your business
Potential small business loan providers will use your personal credit score to assess your financial background — and how likely you are to pay them back — particularly when your business is new.
One of the most commonly used credit scores is the FICO Score, which ranges from 300 to 850. A good credit score starts at 670, and the higher, the better. The biggest contributors to the score are payment history, how much debt you carry relative to your available credit and how long you’ve been using credit.
Your personal credit history will affect your business in the following ways.
Whether you qualify for a business loan
Without good personal credit, you’ll typically have trouble qualifying for a traditional bank loan and most loans from the U.S. Small Business Administration. You’ll build a separate business credit profile as your business grows — more on that below — but to start, your personal credit will be especially important when applying for funding.
You still have loan options if you have less-than-stellar credit. One option is a microloan from the U.S. Small Business Administration. They come in amounts of up to $50,000 and offer access to counseling services for growing businesses.
Interest rates you receive
You’ll get more favorable rates and terms on a credit card or personal loan with good credit, and the same is true for small business loans. A range of requirements will determine whether you qualify for small business financing, including your cash flow and time in business. But good personal credit will make you eligible for the lowest interest rates for online loans, for instance, which can provide funding faster than other sources.
Additional funding options available to you
Strong credit will also make it easier for you to qualify for a business credit card, which can give you flexibility with financing and even rewards like cash back or a promotional interest-free period. You will be personally responsible for repaying the debt, though, and it’s just as important as in your personal financial life to pay your balance in full each month if you can.
3 ways your personal credit may not affect your business
Some financing methods don’t require a credit check at all. Plus, once your business is up and running, you can develop a business credit profile separate from your personal file. That will help lenders and potential customers use your business behavior and history to determine whether to work with you.
You’ve built separate business credit
As your business grows, you can help it build its own credit history, attached to the Employer Identification Number you receive from the IRS. Your business credit score appears to lenders as a number between zero and 100.
Like a personal credit score, a high score means your business is likely to repay lenders on time and in full. Good business credit can affect your loan terms and how much you pay for business insurance. Building business credit separates your personal credit history from your business life, and can keep you from having to take personal responsibility for any debts your business incurs.
You self-fund the business
Using your own money to start a business, or borrowing from friends and family, will let you bypass types of funding that require good personal credit. If you have cash saved or operate your business in your spare time, on top of a full- or part-time job, you can avoid including your personal credit score in the equation. That can help you spend time improving your score, if necessary.
You opt for crowdsourcing
You don’t need good personal credit to raise money for your business through crowdfunding, which can help build excitement around a product or service and grow a community of supporters.
But you may be expected to express thanks to funders with a gift or even equity in the business. Make sure you understand how that could affect your personal finances or business plan before pursuing crowdsourcing options.
Ways to improve your personal credit
If you need a higher personal credit score to support your business, work to improve your credit with these strategies:
- Pay all your bills on time. This is the biggest contributor to your credit score. Set up automatic payments for credit card, student loan and utility bills, and for any subscription services you use. Keep tabs on your bank account balance so you’re not at risk of paying fees for overdrawing your account.
- Lower your credit utilization. The next-most important element of your credit score is how much debt you owe relative to the amount of credit you have available. Work to pay off outstanding debt by paying more than the minimum until it’s gone, then use as little of your credit limit as you can.
- Keep old accounts open. Even if you’re no longer using a particular credit card, you don’t need to close the account. That could lower your overall credit limit, affecting your credit utilization ratio. Your oldest accounts also help you establish a long credit history.
The bottom line
It will take time to improve your personal credit score if it’s lower than you’d like. But the process will make available financing options that can help your business grow. If you’re just starting out, strong personal credit could give your small business the boost it needs.