What is your personal credit score impact on your business credit score? How does it affect your small business? In a nutshell, your personal credit typically helps you secure a small business loan. However, a business loan shouldn’t impact your personal credit score if you secure it correctly. You should also make sure you’re taking out a commercial loan in the business’s name and not your own.
According to the Federal Reserve, the average small business loan is $107,000. You can imagine how borrowing such an amount of money on your personal credit might impact your debt ratio score. It can make it impossible to buy anything you might need for personal use. However, lenders do report the loan and payments or lack of payments to commercial credit reporting agencies.
Here are some things to keep in mind when seeking a loan for your small business. These tips may help you secure the cash flow you need while protecting you from making a mistake that will drown you in business debt.
Why Your Personal Credit Score Matters
Most small business owners haven’t borrowed via a commercial loan before. The lenders could look at your personal credit score to see how well you handle money, but they are most likely to look at your business credit score. Do you make payments on time? Have you defaulted on any loans? While your business is separate from your personal credit, how you handle your finances tells the loan office a lot about your organizational skills and dedication to paying your debtors. You can check your personal credit score for free here.
Why Borrow Money?
Perhaps the idea of borrowing money for your business makes you a bit nervous. Even a Paycheck Protection Program (PPP) loan may need to be paid back eventually. Right now, interest rates are low, so it’s a smart time to free up money to expand your business or launch it for the first time. Make your business money work harder for you by putting extra cash flow where it does the most good for your industry.
How to Improve Your Business Credit Score
What if you had a difficult time at the beginning of 2020, and your business credit is shot? Perhaps you are new and simply haven’t built up a credit report for your business. There are several things you can do to improve your business credit score:
• Establish your brand name. The more well-known you are, the more banks will be willing to take a risk by lending you money. A thriving business is a much better investment than a struggling one.
• Pay suppliers on time. Develop strong relationships with those who’ve extended credit to you. Pay them on time and keep your account balances low. You can use your regular payments on Net-30 or Net-60 to show a lender how reliable you are with your vendors.
• Automate payments. If you need to set up automated payments, do so. One of the first things creditors look at is whether you pay your bills when you’re supposed to.
• Take out a business credit card. Find a business credit card that reports to the credit agencies and charge small amounts, paying them off each month. Regular payments and a low balance builds your business credit score.
• Fix credit report inaccuracies. It’s not uncommon for inaccuracies to appear on a credit report, whether it’s for your personal or business credit. Check yours to ensure there are no inaccurate issues bringing down your score. If there are, you can dispute them by contacting the credit bureaus or having a credit repair service handle communications with the agencies.
Taking the time to gain an excellent score gets you lower interest rates and ensures you’ll have cash available should you need it during lean times.
Alternative Financing Options
If you’re still unable to secure a small business loan, you could look into alternative financing options. Some things you can do to get cash flowing into your business include:
• Take on silent investors. You run the business, and they gain some of the profit. Be cautious about outflow. You don’t want to borrow money and then find yourself strapped for cash due to paying out high percentages of revenue.
• Seek crowdfunding. Go online and ask others to invest in a new product idea or creative endeavor. For example, you can offer a video of an early prototype of a new product. People buy it ahead of time, and you gain the funds to produce and deliver it.
• Ask family and friends. The people who love you want to see you succeed. Ask your family and friends if they want to invest in your business.
• Sell what you don’t need. You likely have belongings you can live without. Perhaps you don’t need a fourth display case. Sell anything you don’t absolutely need to generate a little extra cash flow.
Of course, in addition to financing, you can also hold sales to move inventory that’s sitting around, reach out to customers with great offers and throw special classes that you can charge additional fees to attend.
Separating Business and Personal Finances
One of the key factors in keeping both your personal and business credit score top-notch is separating the two. Never mix your business funds with personal funds. Pay yourself just as you would any other employee. Business revenue and expenses are always paid via a business checking account. Personal expenses come out of your personal account.
Isolating the two types of expenses protects your personal credit. Additionally, if you ever get audited by the Internal Revenue Service (IRS), you’ll have a much easier time tracking down what expenses you claimed, which helps you avoid subjecting yourself to unwanted scrutiny.
Should You Use Your Personal Credit to Get Started?
Since a brand-new company may not have the score to secure a loan, you may not have a choice if you want to fund your dream. Just make sure you treat any personal obligations as such.
Separate them the minute you can secure a better business credit score and obtain separate financing. Pay yourself back or pay off loans you took out and work to establish both a stellar personal and business credit score.
