Consumer debt was already approaching $14 trillion in the second quarter of 2019, says the New York Federal Reserve, marking the 20th consecutive quarter for increases. The current health crisis has only exacerbated the problem, with Deloitte noting that it has had a big impact on loans and distressed debt. If your credit score has recently taken a hit and you are in business or you would like to start one, this may affect your long-term plans. How can you minimize the impact of personal debt and convince investors to trust in the success of your business?
The Effect Of Personal Loans On Business Financing
If you have a small business or you are the main investor in a current business or startup and you need financing, know that a poor personal credit score may affect your chances of success. Banks and other lending institutions will look into liquidity problems, problems with cash flow and tax issues, so it is important to make improving your score a priority. There are many steps involved in improving a credit score. These include debt consolidation, paying off high interest loans or credit cards first, paying more than your minimal credit card payment, and setting up a strict payment schedule. You should also consider having your credit score reviewed, as one study by the FTC shows that one in five people have an error on at least one of their credit reports. These errors can lower your score and stand in the way of much-needed financing.
Obtaining an Installment Loan
If you are denied a business loan because of a low credit score, you may decide to take out an unsecured loan or an installment loan that you can pay at regular intervals. Companies such as Crediful suggest that you research well into different lending companies before making a choice. These loans vary greatly in terms of loan amounts offered, APRs and loan terms. Some offer up to $10,000, but they may impose a higher interest rate if you need several months to pay the amount off. Installment loans should be seen as an emergency open taken when a sure investment opportunity arises that can help reduce your debt and pull up your credit score.
Reducing Personal Debt
It is vital to take steps to reduce ‘bad debt’ so as to improve your business stability. Steps include limiting the amount of unnecessary debt you incur. Thus, if you need a business vehicle, opting for one that is secure and spacious enough for your purposes (instead of one that is luxurious) can significantly help reduce your monthly burden of debt. You should also look well at your monthly expenditure, using budgeting apps like Mint or PocketGuard to track unnecessary expenses and to create a new savings strategy. Finally, your business skill may be in demand by other companies or clients, in which case a second job may just be an ideal way to pay off debt and even build up capital for further investment.
Although your business is (or will be) a separate legal identity, personal debt is a key factor in obtaining financing, especially if you are the sole business owner. In order to build trust in your company, it is therefore important to reduce bad debt by working on methods to repay your loans and credit cards (especially those bearing high-interest rates). Reduce personal debt by taking a multifaceted approach to the problem, looking for ways to spend less while finding additional sources of income.
