When someone asks, ‘what is a bad credit score?’ the answer usually comes in the form of a number. In most cases, this is the only reasonable way to answer, right? Unfortunately, it’s a bit different for a business owner. Fair or not, bad credit is the bane of every burgeoning entrepreneur.
Personal Credit and Owning a Business
You might think your personal finances have nothing to do with your business, but the exact opposite is actually the case. A bad credit score can damage your business in a number of ways. In fact, bad credit can even prevent you from getting your business started.
A business owner without much experience will be subject to personal credit checks when seeking business loans. Your financial past lets lenders know what you are capable of paying. Understanding your own personal credit score gives you a better idea of what you are eligible to get.
Your credit score tells lenders how reliable you are. Poor personal credit makes you much more susceptible to rejection when applying for a loan. In cases where you do qualify for a loan, bad credit can result in much higher interests than you’d otherwise have to pay. Either way, you could miss out on golden opportunities and the growth of your business could grind to a halt.
Why would a company invest in your business if they don’t know whether it’ll pay off or not? To get the funding you need, you have to have proof that you are good for the money. A good personal credit score could be enough to get the loan that you need, but no bank is going to invest blindly.
What is a Bad Credit Score? A Guarantee You’ll Have Issues with Loans
In the US, an individual’s credit score can be between 300 and 850. A high credit score is most likely sufficient to qualify for at least a small loan, but your application might be automatically rejected if it dips below certain levels. When this happens, it doesn’t matter how well you plead your case.
Over the last few years, banks have significantly decreased the number of loans they are giving out to small business entities. It just isn’t as safe an investment as it used to be. This makes it even harder for business owners with low credit scores to get the financing they need.
If this happens, you may need to find alternative lenders. Unfortunately, unconventional lenders charge higher interest rates than banks and government- funded loan agencies. While private investors may offer you what you need, it’s less reliable and might cost you even more in the long run.
Small business loans are just like any other investment. There are risks and benefits for the lender. Potential lenders will assess whether or not you can pay back the loan. Any interest charged pays for the evaluation and to cover the risk they are assuming as the lender. The higher a risk you are, the higher the interest you’ll be asked to pay.
Supply and Inventory Issues
Many providers, not just lenders, analyze credit scores to determine their prices. Utilities will look at the scores when you apply for services and may request bigger deposits from clients with low credit. Real estate firms do the same, trying to avoid risky clients who might break their lease early or fail to pay rent and maintenance fees on time.
Distributors may avoid clients with low credit as well, especially those who sell commodities in installments. They will be forced to charge you more than their usual rates or deny you service altogether.
These are all things a business needs to run successfully. Without fair pricing, the overhead for your business can skyrocket. If you can get these industries on your side, running the business will be much smoother.
You Might Not Even Get Your Business Off the Ground
Having insufficient capital can derail the vision you have for your business. Startup costs such as insurance, licensing, permits, equipment, advertising, marketing, and payroll can prove giant obstacles in opening a business. Lacking in any one of these areas can cripple an opening and missing some are downright illegal.
If you don’t have enough money, starting a business can be tough. There are non-traditional ways such as investing personal resources or crowdfunding on platforms like Kickstarter and Indiegogo, but these are risky and hard to count on. As a business owner, you deserve to have your business the way you want it, but you’ll certainly need funding to get there.
Bad Credit, Tough Outcomes
Poor credit can prevent you from achieving your vision. Bad personal credit will make lenders reject your loan applications, charge you more interest, and force you to pay more for your space, utilities, and inventory. Check your personal credit scores before applying for loans to try to get the most out of your money. Improving your own scores now can save you thousands later.
So, what should you answer when someone asks, ‘what is a bad credit score?’ Hopefully, that’s an easy one by now. A bad credit score is something that a business owner must desperately try to avoid.
About Stewart R. Custis, CPA
CPA with 20+ years assisting individuals and small businesses navigate the ever changing and ever complex tax and accounting regulations.
Email: [email protected]
License ID: 29421 – State of Virginia