Many factors come into play when building your business finances – and your personal FICO score is all but a neglectable one! This number represents a summary of your active credit file, describes your reliability as a borrower, and offers lenders a snapshot of your finances as a whole.
In turn, a bad credit score can lead to a cascade of business-related side effects, including fewer business loan options, higher interest rates, and having to pay for major purchases upfront. Luckily, some useful strategies can help you take your business off the ground while you are rebuilding your FICO score – learn more below!
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5 Business Side Effects of a Bad Credit Score
From causing cash flow issues to preventing access to business loans, a bad credit score can impact all aspects of your personal and business life.
Here are some of the biggest business problems caused by a bad credit score:
Unable to Access Business Credit Cards
If you are operating a new business or an organization without an established credit history, it is important to know that lenders will often use the owner’s Social Security Number and credit score to determine the entity’s creditworthiness.
Depending on how low your FICO score is, you might only be able to access business credit cards with low credit limits and interest rates as high as 29%. In the worst-case scenario, you might not be able to access credit at all!
Hindrance in Getting a Business Loan
If you are in the process of funding or growing a business, you should be aware of the impact that a low credit score might have on your chances of securing a business loan.
Although the minimum credit score required is 680, a low score might impact your business’s finances throughout your repayment period through high interest and disadvantageous loan terms. Ultimately, you should consider spending some time improving your credit score before applying for a business loan.
Affects Your Relations With Utility Providers and Suppliers
Getting a business off the ground will require owners to establish a network of distributors, suppliers, and third-party vendors. However, since most of these providers conduct background checks before partnering with a business with a bad credit score, you might not be able to set up an account and pay for common utilities such as water, electricity, gas, and internet.
In case of denial, you might have to resort to producing a letter of guarantee, setting up an account with a co-signer, paying a deposit, or, in the case of suppliers and vendors, paying for purchases upfront.
Insurers Can Increase Your Premium
If you have invested in a business, you should not think twice about protecting your assets with a business insurance policy. Nonetheless, business insurance premiums can represent a significant expense, especially if you are looking to cover assets such as your fleet or your employees.
While your credit score is only one of the factors insurers will take into consideration when calculating your premium, a poor personal FICO score can cause your monthly costs to skyrocket!
Your Credit Score and Cash Flow Are Interrelated
Your business’s cash flow determines your creditworthiness; vice-versa, your credit score will impact your cash flow.
Poor or limited credit history might put you in the position of having to pay for major purchases (i.e., equipment upgrades) upfront or having to draw cash to maintain your inventory.
While these might not seem like major issues at first, not being able to take advantage of credit or installments can lead to severe cash flow imbalances!
Overcoming the Most Common Side Effects Of a Poor Credit Score
Rebuilding your credit score isn’t something that can be done overnight. However, with the right strategies, you can more easily deal with the business-related issues brought on by your bad credit and work towards improving your finances.
Opening a Business Bank Account
Opening a business checking account with bad credit is easier said than done. However, today, you have multiple options you can rely on.
For example, you can open a bank account online with no deposit by choosing online providers like Chime and Current. Another option is to build a relationship with a local bank or credit union, which is likely to have more lenient eligibility requirements.
Getting a Business Loan
If you have a bad credit score, the most advantageous business loans might seem out of reach. However, you can still access viable funding sources through microloans and online lenders. You can also start building your business’s assets through solutions such as equipment financing and installments.
Alternatively, if you have a credit score of at least 640, you can tap into loans backed by the Small Business Administration (SBA), such as SBA 7(a) loans and 504 loans.
Starting a Business With a Low FICO Score
From hurting your business FICO score to precluding access to business loans, a poor personal credit score can impact your business in many ways.
Luckily, there are many ways to take a new startup off the ground without great credit or a traditional loan! For example, you might consider bootstrapping your enterprise, running a crowdfunding campaign, or resorting to the help of an angel investor. Alternatively, you could ask for loans from your friends and family, which will give you greater flexibility in terms of repayments and interest!
Rebuilding Your Credit Score
Rebuilding your credit score can take months or years and even more importantly, it requires ongoing commitment. However, you can be sure that your hard work will pay off!
Start by keeping up with payments and expenses, reducing your debt, increasing your income, and learning how to use your money wisely. If you need an extra boost, don’t underestimate strategies such as rapid rescores and credit-boosting programs.
Lastly, don’t forget that the help of a specialized financial advisor or business accountant might be invaluable!
