May 28, 2014

What’s Your Credit Score (And Why It Matters)?

why your credit report is importantYour personal credit score isn’t just critically important when you look to get a home mortgage, but as a business owner, your credit score will have a significant impact on your ability to finance your business’ growth.

A low credit score will limit how much of a personal credit card debt limit you will be approved for, or whether you’ll be able to get credit at all. It will also have an impact on the interest rate you get from the credit card issuer.
While it’s not recommended that entrepreneurs use their personal credit cards for business purchases, in cash-crunched small businesses this does happen and if you have limits on how much you can put on your personal card that will limit those business purchases.

Going a step further, when you apply for a business credit card your personal credit score will be evaluated to help the credit card company determine what your limit is. Even if your business credit is perfect, your personal credit may impact your credit card limits.

Wait, what’s business credit?
Just like there are reporting agencies for your personal credit history (with Equifax, Transunion, and Experien being the Big 3), your business credit history is also recorded (mainly through Dun & Bradstreet) and will be scrutinized when/if you apply for a bank loan or bank credit card.

So do I need to worry about my personal or my business credit?
The answer is that you actually need to worry about both. If your business is newer then your personal credit is going to weigh much more heavily anytime you look for financing for your business. As your business grows, your business’ credit history will have more of an impact on that decision however, for small businesses, your personal credit will continue to be the major driver of credit decisions by banks and credit card companies. How well you manage your personal finances is a good indicator on how well you’ll manage your business finances.

“The personal credit score is the lynchpin to everything,” says one small business advisor.  “Your business matters – they want to know how much sales you have and how you’ve paid your vendors – but they’re really concerned with your personal credit because that purports how you handle your finances.”

I’m not planning on applying for credit or a loan so I shouldn’t be concerned about this, right?
You may not be planning to apply for credit or a loan right now, but what about down the road? What about if your company all of the sudden gets a purchase order that you need a loan or financing to help you fulfill? It’s wise to take the time now to understand your credit and, if needed, work to improve your credit score. It takes a lot of time to rebuild your credit so better to use that time now when you don’t need it so that in the future, if you do, your credit will be nothing short of perfect.

If my credit has had some hiccups in the past, what can I do about it?
Everyone experiences financial trouble from time to time, especially with the Recession in the not too distant past. The Federal Trade Commission has created a short free e-publication titled Building A Better Credit Report that can help guide you as you work to rebuild strong credit.

* All finance articles are reviewed by small business financial experts to ensure the material presented is up-to-date with all current regulations.

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