[ad_1]

Featured Image Source: Unsplash

Opening up a new business is a life-changing decision. You have to commit to a significant amount of work in a short period of time, and you’ll need enough financing to get the ball rolling. However, a bad personal credit score can prevent you from scaling as quickly as possible.

The Relationship Between Personal and Business Credit

When you start a business, you typically won’t have a business credit score. That isn’t an issue for lenders if your personal credit score is 700 or higher. Lenders will initially use your personal credit score for financial products you’ll use for your business, but this eventually changes.

The longer you stay in business, the more likely lenders are to use your personal and business credit for business lending. While a bad business credit score won’t affect personal lending, a bad personal credit score may affect business lending, even if your business credit is high.

Ideally, you’ll keep both credit scores high to keep your business finances equally high. Pay attention to the things that can negatively impact your credit score to avoid financial difficulties.

Understanding What Affects Your Credit Score

Personal and business credit are affected by similar factors, but there are a few things that make them distinct. Here are a few ways personal FICO and business credit scores differ:

  • Personal credit scores range between 300 to 850, whereas business credit scores range from 0 to 100. You need a minimum of 600 (personal) or 75 (business) to get a loan.
  • Consumer lenders use Equifax, TransUnion, and Experian, whereas business credit uses Equifax, Dun & Bradstreet, and Experian. FICO and VantageScores for consumers are standardized, whereas every business lender will use a different formula.
  • You can monitor your personal credit scores for free from multiple lenders. For example, you can use apps like SoFi to monitor your credit score safely. However, it will be difficult to find an app that lets you view your business credit score for free at any time.

When it comes to the factors that make up your credit score, personal and business credit won’t differ significantly. Here are the credit similarities between your personal and business score.

  1. Payment History: Your payment history is a record of whether you pay your bills on time. This accounts for 35% of your personal credit and varies for business credit.
  2. Credit Utilization Ratio: Your ratio is calculated by comparing how much revolving credit you had and how much you’ve used. This accounts for 30% of your credit.
  3. Credit History: Your credit history is calculated by looking at the average age of your combined accounts and your oldest account. This accounts for 15% of your credit.
  4. Account Mix: Your account mix looks at how many installments and revolving accounts you own and populates a score. This accounts for 10% of your credit score.
  5. Credit Inquiries: Your percentage will go down if you make too many hard inquiries, but soft inquiries don’t affect your score. This accounts for 10% of your credit score.

Once you get a business credit account, you also have to consider business longevity, your annual revenues, assets, public records (for liens and judgments), and industry risk.

How a Bad Credit Score Can Impact Business Finances

If you consistently make poor lending decisions, your credit score will plummet. Once that happens, you’ll have a hard time qualifying for financing, which can cost you your company.

1. Higher Loan Rates

A personal credit score of 699 or lower and a business score of 79 or lower will cause lenders to give you higher interest rates on loans. The difference between an interest rate on a good and a bad credit personal loan can be as low as 5% and as high as 36%, according to NerdWallet

2. Low Lending Potential

A low credit score indicates to banks that you’re a high-risk customer. You won’t have the same amount of access to low-interest loans, and you may be denied for certain financial products. This could make it impossible for you to buy necessary equipment or other essential items.

3. High Insurance Rates

Insurance companies often interpret a poor business credit score with bad business practices, even if that isn’t the case. Either way, insurance companies will use this as an excuse to jack up your rates to protect themselves. This leaves you with less money to use in your business.

4. High Vendor Costs

Vendors won’t work with businesses that have a history of delinquent or late payments. On top of that, vendors talk. If one vendor knows you can’t be trusted, it won’t be long until the rest figure it out. With fewer options to choose from, you’ll have to settle for high vendor rates.

5. High Utility Costs

If you own an eCommerce or dropshipping business, then high utility costs won’t be a problem. However, if you own a warehouse to store your products, then you’ll likely pay higher utility costs than the average business owner. These costs can start to pile up really quickly.

[ad_2]

Source link