The 2008 financial crisis has passed almost a decade ago now. Yet small business owners continue to see their applications for business credit being rejected. In fact, according to various sources including Biz2Credit, banks only approve one in every four small business credit applications. Moreover, banks often cannot lend less than $100,000 profitably.
One of the key reasons for loan rejections is a bad credit score. Even if you’ve been in business for a few years, your business credit score is still inextricably linked to your personal credit for reasons explained by Fundbox CEO, Eyal Shinar in this recent article on Enterpreneur.com.
But now there is an alternative. Thanks to innovations in financial technology, the days of relying on personal credit to secure business financing are over. Fundbox, for example, makes it easy for business owners to apply for a line of credit with just a business bank account or an accounting software such as Quickbooks, no FICO score required to start.
— Fundbox (@fundbox) July 28, 2017
Unhindered by concerns about credit, Fundbox helps businesses grow and thrive. But that doesn’t mean you can throw away concerns about your personal credit score. Bad credit still holds sway over other areas of your business, many of which are often overlooked.
So, how can poor credit score hurt your business? Here are few issues to consider…
Bad Credit Can Hinder Your Ability to Operate
Poor credit can spread its impact like a virus so that it becomes harder and harder to operate your business. For example, if you’re looking to lease equipment, a vehicle, or a commercial building, a bad personal credit score will make it tougher to secure favorable rates and terms for a business line of credit. Want power, water or gas to your building? Many utility companies will check your score before opening an account.
Buying raw materials or inventory also gets much harder if your credit isn’t up to snuff, especially if you’re looking to get on a payment plan or negotiate longer terms.
Bad Credit? Expect Higher Rates on Credit Cards
Credit cards are one of the top three sources of short-term capital used by small business owners. If you have a bad credit score you may have a hard time securing good interest rates. Why? Because banks and other business lenders may view your application as a higher risk and therefore they will likely quote a higher interest rate.
Higher Insurance Premiums
Business insurance is a must. When insurance companies determine your premiums, they too check your credit file. And they may charge you higher premiums if your credit score is on the lower side of the spectrum.
Limited Purchase Order Financing Options
If you are a manufacturer or a wholesale buyer, preparing decent line of credit for future PO financing needs is crucial to keep your business afloat and grow when opportunity calls. For manufacturing business owners, maintaining good credit may give you a competitive advantage over competitors with less than ideal credit score and therefore limited PO financing options.
Your Business Worth Will Take a Hit
No one wants to buy a business that hasn’t been able to negotiate good deals with its’ suppliers. When you sell your business, your business credit score is part of the deal. If you have a history of good credit, your buyers’ bank will look more favorably on the business as a safe deal for them to invest in. If you have good business credit, you’ll want to advertise that fact to prospective buyers.
As you can see, the health of your business credit can have a far-ranging impact on your business. Don’t neglect it, check out these 6 Hacks for Building your Business Credit including separating your business and personal finances, monitoring your credit files regularly, adding trade references to your credit file, and more.