Communicated Content – If you’re a budding entrepreneur, or you simply have your mind on a startup idea you’re looking to pursue, there are a few ducks you have to get in a row before you dive in. One of those ducks is undoubtedly a good credit score. If you are looking for funding for your business venture, you’re going to need some good credit to back the decision of the lender. Research shows that around 88% of startups do manage to make it past the first year mark, but fewer, around 39% don’t make it past five years. This is due to limited finance options due to, you guessed it, a bad credit score. It takes time to build credit, which a new business doesn’t often have.
If you’re looking for business funding, take a look at our guide to a business credit score and what you can do to improve it.
How does your credit score affect your ability to found a business?
Just like your personal credit score, a business credit score tells a lender what reputation you have when it comes to repaying loans, and therefore how safe an investment you will be.
However, the state of your credit score is determined by different factors in your financial history, such as your industry, the age, location, and size of your business, what existing credit is available in your company, your repayment history if you have borrowed before, any past applications for finance, it doesn’t matter if you were approved or not, any existing company accounts, any trade credits you might have secured, the details of ownership in the company, and any outstanding court judgments.
Checking your credit score often isn’t advised when it comes to your personal credit score, as that brings down your credit score, but it is necessary for business as a first step to improving it. However, your business credit score depends on who you ask. There isn’t a standardized way of determining your business credit score so different sources come to different conclusions.
All this is to say that a good credit score is an important part of getting a business loan and founding or otherwise financing a business startup. But there are other reasons why you should monitor your business credit score.
For one thing, credit scores change with time. Any changes that might occur will have to be picked up quickly to be fixed, which might even be an error or fraud. You will have to move quickly in order to report and fix these issues. Keeping on top of your credit score will force you to make smarter cash flow decisions that will keep your interest low and your credit score high.
Another is that credit scores are an indicator not only to lenders but to partnerships. That’s right. Unlike your personal credit score, business credit scores are not private. With a business credit report, you can assess a business history, including judgments and bankruptcies. If you assess your partner and vice versa, you might see something you don’t like, or nothing and either way make better decisions on who you work with.
Are there ways to get your business credit score up?
There are lots of ways that you can bring your business credit score up. Some are as small as getting a notification on your phone and others will take some strict budgeting.
First of all, if the company making your credit report has the ability, you’re going to want to opt into notifications or email alerts when your credit record is changed or searched. This is so that you can react to any changes that might come up as soon as possible. Make a plan to regularly check your business credit score. Whether it’s every month or every quarter, you’ll want to make sure that you are aware of every change as soon as possible so that you can work to fix it. Suppliers, customers, and vendors can also affect your business credit score, which means you will also have to monitor their business credit scores to ensure that your own isn’t affected.
Whether we’re talking about bills or suppliers and partners, make sure you keep up to date and on top of payments. If you don’t pay on time and in full your credit score will suffer as much as it would if we were talking about a personal credit score. If you are struggling, you can look into changing your invoice payment terms and use online accounting tools to stay on top of all your payments. You can even help this out even more by paying early.
Consider getting a business credit card. Small businesses in particular can benefit from a business credit card that will allow you to use a foreseeable reliable cash flow to make regular repayments on time and in full to build your credit the same way a credit card aids a personal credit score. There is also the perk that they usually come with rewards for travel and expenses. However, like a personal credit card or even business loans, start small and pay it off in short-term bursts. This way you’ll be able to reliably pay them off and your credit score will show it.
The company or authority that created your business credit report, and subsequently your credit score, can be sent data on your payment history by your business partners and suppliers. The more timely and full payments you show, the more your score will improve.
Close any accounts you don’t use anymore because looking like you have a lot of credit available can weaken your score. And keep on top of your personal finances while you’re at it. Even though business and personal credit scores are kept as mostly separate entities, small businesses and startups do not have a lot for a lender to go on, so they end up looking at your personal credit history.
And finally, try and get your company accounts filed before the given deadline. If you file your accounts late, it can look to your credit report like financial problems.
