We know that bad credit can increase mortgage rates and wreak havoc on our monthly instalments for car loans or home loans. While business credit is separate from personal credit, do not think for a second that your personal credit can’t negatively impact your business, because it can and some financial institutions ask to see your credit scores. This means, if you have any outstanding dues, debt repayment should be made a priority.
Here are the negative effects of poor credit on a business venture:
1. Personal credit scores
If you do not have any credit history, or very little credit when it comes to business credit, banks and other financial institutions will refer to your personal credit score. This can be problematic for some people. The bank will most likely reject your application for a loan if your score is too low. If you happen to be accepted, your high interest loans will set you back considerably. The other drawback to compound your troubles is that you may fail to get upgrades or inventory, and in this way you may be stifled at every corner before your business can take off. You might have to dig into personal finance options if this is the case.
2. Inherent problems with loans
The problem with loans is that if you have poor credit history, you will most likely be rejected by the bank. To make matters worse, as the economy is in a slump, many banks are cutting back on the loans they give to small businesses. The only option these entrepreneurs have left to get their venture off the ground is to approach alternative lenders. While banks and other credit institutions may have ties to the SBA (Small Business Administration), but these alternative lenders have no connection to the SBA. They will view business finance as they do any other investment. They will critically analyse whether you can recoup your capital. The interest charged on the loan will act both as a fee for services rendered and to measure the profitability of your venture and risk you pose. If you happen to default, or if they think your venture is not very stable, they may increase interest rates.
3. Strain in business relations
Another problem you might face is getting your business up and running. You may have trouble with utilities who might ask you to make an additional deposit upon seeing your poor credit scores. Entrepreneurs report trouble in real estate. Even less are willing to lease out properties for fear of defaults or lessees pulling out before paying their maintenance and other dues. Additionally, distributors may not want to work with you and provide raw materials or other goods because they may also be fearful of a default when they provide you goods on credit or on instalments because of the high costs. All these problems will make it difficult for your business to grow.
4. Inability to start business
When it comes to business, there are high costs associated with startups. You have to pay for inventory, licensing and permits, equipment, payroll of employees, and even marketing costs. It can be very difficult if you do not start recouping your capital at an early stage. Some people prefer digging into their personal finance or approaching friends and family for finance to get started. This can be a safer option. Alternatively, you can use crowdfunding platforms, like Kickstarter or Indiegogo, but these have several obstacles to overcome as well.
To conclude, poor credit scores can negatively harm your chances of succeeding in business so you need to work on your credit scores to ensure all debts, like credit card debt, are cleared on time.