Once you register your business as an LLC or a corporation, he starts building his own credit score. However, this does not mean that your personal credit score is irrelevant because it takes time and substantial income to make your business fully self-sustaining.
If you have a bad credit score, this can cause problems for your business. Here's how your personal score affects your business and how to increase your score as quickly as possible.
Most business financing depends on your personal credit
Lenders will generally require that you, as the business owner, provide a personal guarantee for any type of business financing, which may include:
- Business Credit Cards
- Business Loans
- Microcredit from the Small Business Administration (SBA)
During the application process, the lender will apply for firm credit on you. They use this information to determine whether to approve your application and, if they agree, the terms of your funding.
With a personal credit score that falls in the middle or low range, you will have fewer options for business financing and higher interest rates. Even if you plan to use your own money to start your business, it is still advantageous to have a good credit score so that you can qualify for professional credit cards and earn rewards or discounts. in money on your expenses.
Now successful businesses end up at the stage where they can get their own financing, but that does not happen overnight. Until then, lenders will take your credit into account and hold you responsible for everything you borrow. Otherwise, it would be risky to lend anything to a new business, because the lender would have no recourse if this business broke down.
Checking Your Credit Reports
If you are not sure what your credit score is, then you should start by asking for credit reports from Equifax, Experian and TransUnion. The Fair Credit Reporting Act entitles you to a free credit report per year from each office.
Although there are online tools and financial apps that will tell you your score with at least one of the credit bureaus, you should always ask for your credit reports so that you can check them for errors. Do not assume that the credit bureaus understood everything, because a report from the FTC revealed that one in five credit reports contained an error.
If you notice any errors on a credit report, you can have them deleted by contacting both the credit bureau that issued the report and the creditor behind the error. Depending on the severity of the error, this could have no impact on your score or increase it enough.
Improving Your Credit Score
If your score is not 720 or more, then improving it should be a priority. Each credit bureau has its own formula for calculating credit scores. The good news is that all offices have two factors that weigh heavily on your score, which are:
- Payment history
- Use of credit
This makes it simple enough to increase your score. For the payment history, the only payments that matter are those that are reported to a credit bureau. Even though your standard bills are not eligible, credit card payments will still be eligible.
Use a credit card every month, pay at least the balance of your statement by the due date, and improve your payment history without ever touching interest. To get the best return on your expenses while you create your credit, try one of the cards with the highest reward rates.
The standard recommendation on the use of credit is to keep it below 30%, but the decline is still better. Because of the importance of using credit, it can actually help your score when you have multiple credit cards because more credit cards mean more credit available and lower usage (assuming that you do not use more credit available). ]
A bad credit score is a major obstacle in life, and it can also be detrimental to your business. It is in your interest to adopt financial habits that benefit your credit score, especially since these habits will also help you better take care of your business' money.