Whether you are launching a side hustle, a startup, or a small business, you need to remember that your individual personal finances are just as important as your business. Undeniably, starting a business requires a certain level of capital, perseverance, and sacrifice.
Small business owners are notorious for doing whatever it takes to keep their business afloat. This grit is what makes them unique; however, sometimes it puts them between a rock and a hard place when it comes to their personal credit score. Here are four reasons why business owners need to care about their individual credit score and how to build their credit responsibly.
1. Business Lenders Care
As you can imagine, financial institutions and business lenders care about your personal credit score. They are not going to lend money to a small business owner who routinely defaults or misses payments. They need to ensure you are a ‘safe bet’ and truly creditworthy. Makes sense, right?
Additionally, most sole proprietors and small business owners fail to separate their personal and business finances from the start. This intertwinement of finances is what puts most small businesses at risk. And if your company has not established business credit history, then you may be forced to get a personal loan to finance your business which is more common than you may think. Especially if the business owner has an excellent individual credit score. They will receive a personal loan with affordable rates vice a small business loan that is accompanied by a high-interest rate.
2. Outside Investors Want to Know
You think financial institutions and business lenders are the only ones who care about your credit score? Think again. Angel investors and venture capitalist also care. Why? Just like a business lender, they are providing you hundreds of thousands of dollars (if not millions) to fuel the growth of your venture. They want to ensure their capital is in the hands of a responsible business owner who knows the basics of financial stewardship, budgeting, and managing debt. The last thing they want to see is you burn through their capital at an unsustainable rate. Reviewing your credit score gives them a glimpse into how you handle your personal finances and manage debt.
3. Strategic Capital Investments
Ultimately, there is an overlap between your personal and business finances. If you have a good credit score, then you can shop around for competitive mortgage rates or refinance your current loans for a better rate. This allows you to pay less in interest over the life of the loan and decrease your monthly payments. Instead of throwing this ‘saved money’ into your savings account, you should strategically invest it into your business. These investments will help alleviate the financial strain most small businesses endure and will help you grow without needing outside capital. This is known as ‘bootstrapping,’ which is advantageous if you have big aspirations and lofty goals for your venture.
4. Financial Flexibility & Peace of Mind
The primary reason business owners need to care about their individual credit score is because it provides them with financial flexibility and options. Whether you want to apply for a personal loan, small business loan, or raise capital from outside investors, you have options. This flexibility is hard to come by, especially among small business owners who continue to intertwine their personal and business finances. So, if you want to remain in the driving seat and steer your business towards financial success, then continue to improve your credit score and practice good credit habits.
How to Improve Your Credit Score (for Small Business Owners)
As a small business owner, improving your individual credit score is not hard. It requires you to practice good financial habits and remain disciplined. Here are some quick tips to improve your credit score.
- Make Credit Card Monthly Payments – This goes without saying, but if you continue to make monthly payments, then your credit score will go up over time. Remember, payment history accounts for 35% of your credit score. Do not miss a payment!
- Remove Negative Items on Credit Report – Most people have a negative item on their credit report. Work with some credit repair software to file disputes and remove these negative items from your credit report. Each negative item removed will increase your credit score.
- Pay Down Installment Loans – Are you still in student loan debt? Carrying a mortgage? Make sure you pay down all your outstanding loans. Paying these down will improve your credit score the most. In fact, the faster you pay them down, the faster your credit score increases.
Bottom Line: Why Your Individual Credit Score Matters
That’s a wrap! As you can see, your personal score matters as a business owner. The higher your credit score, the better because it will provide you financial flexibility and more business opportunities. Remember, the earlier you start forming positive credit habits (paying off debt, making payments. Ect) the better off both you and your business will be.
Drew Cheneler is a recognized credit and small business expert who reviews credit repair companies and teaches others how to make money. His advice has been featured on CNBC, Fox Business News, The Huffington Post, Moneyunder30, and StartupNation. To learn more check out his website simplemoneylyfe.com.