Many venture into entrepreneurship because of its benefits, including autonomy, flexibility, personal growth, social impact, and potentially unlimited income.
However, everyone knows entrepreneurship can be challenging. It’s often a risky route with numerous difficulties, from raising funding to sustaining profits.
As a new or aspiring entrepreneur, you must be aware of the hidden impact of credit scores on your business’s trajectory. Credit scores can make the journey more challenging for you from the start. For example, you may apply for a business loan without knowing your interest rate is sky-high because of a poor credit score.
Before you act on that new idea, create a startup, or set up an LLC, it’s best to understand the relationship between your personal credit history and score and your business. Knowing the dynamics between the two will help you estimate risk and run your business better.
Here, we delve into the crucial links between personal credit scores and various aspects of founding and running a business, such as funding, supplier relationships, continuing credit, insurance, etc. Once you understand the vital link between maintaining a healthy credit score and business outcomes, you can work on ways to fix your credit and improve your chances of business success.
How Your Credit Scores Impact Your Business
Some entrepreneurs overlook the importance of their personal credit scores. They may even believe it is entirely separate from their business ventures. Nothing could be further from the truth. Your credit score significantly affects your business and affects your company relationships. It impacts your ability to form partnerships, secure funding, and set up contracts.
A good credit score can open doors. Conversely, a poor one can set you up for a significant disadvantage even in the early stages of your business. The following are the most compelling reasons to pay attention to your credit score as an entrepreneur or business owner:
Securing funding
To secure funding for a venture, entrepreneurs typically approach banks, lenders, and other financial institutions for a loan. These financial institutions evaluate personal credit scores to assess the risk of lending money to business owners or founders. A poor credit score could result in a declined loan application.
Hence, credit scores can help determine whether an entrepreneur can jumpstart a business, expand operations, or take advantage of opportunities.
In the startup world, venture capitalists or VCs look up the founder’s credit score and record to see if anything is amiss. Not only do credit scores affect the odds of getting funding, but they also affect the terms of the funding deal. Investors may use them to negotiate the startup’s valuation, interest rate, equity, and other aspects of the agreement.
Startups with low credit scores may be forced to accept less favorable terms and conditions. Examples of unappealing terms include high equity dilution, higher interest rates, lower valuation, and other restrictive covenants added to the contract.
A study by the Kauffman Foundation revealed that startups with low credit scores paid an average of 4 percent higher interest rates and 7 percent less equity financing versus those with high credit scores.
Considering how game-changing a round of funding can be for a fledgling business and how crucial it is to push an idea to fruition, credit score tracking must be an essential element of business strategy and planning.
Entrepreneurs can access, track, and manage their credit scores using free online tools like SoFi’s free credit monitoring feature to help them simulate potential scenarios and obtain actionable insights.
Getting favorable insurance rates
Insurance is foundational to any business. Entrepreneurs will need to set up various policies to protect their operations. A high credit score could result in lower insurance rates and premiums. Conversely, a poor credit score will add an extra burden to your company’s payments.
Obtaining business credit
Business credit scores are just as important as personal credit scores. You must monitor factors like credit utilization, outstanding debt, and payment history to establish a good business credit score. Make sure these variables are in check. Successfully maintaining an excellent business credit score alongside a good personal one makes it easier to secure lines of credit, which are crucial to operations. Moreover, good business credit scores allow you to secure company partnerships quickly.
Establishing partnerships and supplier agreements
Before signing a supplier agreement, supplier companies may review your credit score to check your creditworthiness and financial stability.
A good credit score will make you more appealing to potential partners and suppliers, as it demonstrates your financial capacity and means less risk for them. Poor credit scores raise red flags, reducing chances of landing supplier agreements or other business partnerships.
Business reputation
Your personal credit score is more than just a number. It represents your ability to keep your word, meet your obligations, and maintain a high governance and financial responsibility standard. Empires have been built on reputation. As an entrepreneur, you want to protect your credibility and instill confidence in your partners, investors, and customers. A high credit score is proof that you walk your talk.
Improve Your Credit Score to Maximize Business Opportunities
Given the weight of a personal or business credit score in determining success in many business areas, it is crucial to pay attention and devote time, resources, and effort to improving it.
To start repairing credit scores, entrepreneurs must pay bills on time, manage credit utilization carefully, diversify their credit portfolios, and monitor their credit reports for inaccuracies. In addition, business owners must utilize the accessible technology available to them to track their credit scores and ensure they stay within acceptable limits.
An excellent credit score can lead to better business opportunities, strong partnerships, and deals on everything from supplier agreements to insurance. Remember that banks, lenders, and investors look to credit scores to evaluate the risk level of lending money to a business.
Moreover, vendors often require firms to maintain specific credit scores to establish credit terms.
The opposite is true for a poor credit score. A business may flounder in the absence of funding assistance, partnerships, and crucial credit lines.
Entrepreneurs must prioritize credit management as part of their overall financial strategy to access more financial opportunities and maintain a solid reputation in the business community.
For a business to thrive, founders and owners must monitor their credit scores actively to ensure excellent credit health.
