Small business owners need to stay on top of their personal credit scores far more than the average consumer. If you tend to rely on your charge cards for holiday purchases, it’s important to keep in mind that your personal credit score can impact your business in numerous ways.
Although you and your business have separate credit scores, maintaining strong personal credit has business benefits ranging from saving money on interest and insurance to getting a great cell phone plan without putting down a deposit. Your personal credit score can be a key factor in securing financing from investors, a business loan, or getting credit from vendors.
Many lenders look at your personal credit history as a measure of your ability to meet your financial obligations. Creditors may also take advantage of blended commercial scoring tools that integrate both personal and business credit to assess and predict small business risks.
At Summit Financial Resources, personal credit is not the sole factor we rely on as a predictor of business behavior. However, we consider both your business credit and personal credit when we evaluate the risk involved in providing financing. While we only offer loans to business entities, not individuals, we generally require a secondary source of repayment as a guarantee. If you have bad credit or no resources to pay back the loan, we may determine that the risk is too great to extend financing.
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Protect Your Personal Credit
It’s important to monitor, evaluate, and protect your credit standing just as you would protect any other business asset. If you have less-than-perfect credit, commit to making every effort to improve your score. Here are some basic practices to keep in mind:
- Keep card balances low: Your credit utilization rate, which is the total balance divided by the card’s credit limit, is often a key factor used to calculate your credit score. Using personal credit cards to make large business purchases can make this difficult, so consider limiting business spending to your business credit cards or financing big expenditures.
- Pay bills in full. This can help keep your credit utilization rate low in addition to saving you money on interest.
- Don’t miss a payment. Your credit score tells lenders how likely you are to repay debts in a timely manner, and missed payments can lower your score significantly. Setting up automatic online payments for at least the monthly minimum balance due can help you keep current.
Manage Your Business Credit Card
Business credit cards can help you manage cash flow as well as establish credit in your company’s name. Using a business credit card solely for company purchases and other expenses helps you maintain more accurate records, making it easier to budget, plan, and spot tax deductions. It will also reduce the risk of co-mingling your personal and business expenses, which can save time and help avoid issues at tax time.
While credit cards offer tremendous convenience and flexibility for small-business owners, this may come at a cost if you fail to meet your financial obligations. It’s critical to have a strategy for how you will manage your credit, including being aware of any penalties for not paying the bill in full each month or making a late payment. Ignoring the consequences of not making payments on time may be putting your personal credit score in jeopardy.
Monitor Your Credit Score
Get in the habit of pulling your personal credit report and reviewing it to make sure it accurately represents your credit history. There are three main personal credit reporting agencies: Equifax, Experian, and TransUnion. You can easily access your reports online at AnnualCreditReport.com, and you are entitled to a free report every year from each agency. This report serves as a statement to lending institutions of your ability to honor your debts, and it reflects your total available credit, the length of time you’ve had a credit profile, and the number of inquiries on your credit report.
If there are errors on your report, work to have them corrected. For example, any tax liens that you have paid should be properly marked. Under the Fair Credit Reporting Act, the credit reporting company and the information provider (the person, company, or organization that provides information about you to a credit reporting company) are responsible for correcting inaccurate or incomplete information in your report.
Maintaining strong personal credit can be essential to business growth, especially if you’re looking for financing. Taking the necessary steps to protect this vital asset will help you secure the working capital you need, when you need it.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.