Starting a business venture requires proper financing. Poor credit can impact a business venture adversely as getting a personal finance loan could be difficult. For instance, past default of loans, delay in repayment, are issues that a lender would like to know before providing a loan.
A businessperson who wants to start a new venture needs money, for which he needs to apply for a loan from a bank or a financial institution. However, if your have poor credit score, then getting a loan will be difficult and this can stop you from starting a new venture altogether. Banks and lending institutions always check the personal credit of all loan applicants to determine if they can approve a loan for your business.
How is credit scored?
Credit agencies prepare a credit report outlining the credit history and allot a score—a popular one being the FICO score. A score of less than 600 is considered poor and affects your chance of getting business finance as well as personal finance. Even a score of 699 may not be enough to get a business loan. The poor credit score of the owner can hurt the prospects of the entire business. Don’t fret, if you have bad credit, you may still be able to finance your small business in the following ways:
1. Alternative lenders
Traditional lending sources like banks and financial institutions do not grant loans to those who have poor credit. However, there are alternative lending institutions. They provide personal finance options even if the credit score is poor—but they might offer high interest loans.
2. Build vendor trust
A poor credit not only affects your chance of getting a loan to start a business venture, it can also affect your business later, even if you somehow manage to get a loan. Vendors would hesitate to give credit if your credit score is bad. The pressure on financing would increase if vendors do not give you credit. Even if you start your business, getting additional loans for expanding your business would also be tough. Poor credit can affect a business in a lot of ways.
3. Improve your credit score
To overcome the problem of poor credit, the only option is to improve your score. You need to try and increase your credit score. If you have a separate business score, and if that is also less—you should start focusing on improving that score.
4. Clear outstanding debts
You need to focus on debt repayment to clear old debts and improve your score. For this, you may need to borrow money, even at a higher interest rate as the priority is to improve your score. You can also use business credit cards to manage your financial requirements. Other tips to improve your credit may include:
- Separating your business and personal accounts.
- Paying all your loans on time and don’t default at any cost.
- Taking reliable partners on board who have a good credit score.