How Credit Can Make or Break Your Startup
By Sharita M. Humphrey, CFEI
Are you thinking of starting your own business?
It’s always been the dream – quitting the daily grind of your 9-to-5 job and building your own successful business. In fact, 4.3 million Americans quit their jobs in August 2021, according to the Bureau of Labor Statistics
. And since the pandemic started, a record number of new businesses have been created.
But, before you can turn those new business dreams into a reality, have you actually thought about how you can fund
Few aspiring entrepreneurs have the capital to completely self-fund their business; for many, securing a startup loan is their launching point. This makes being able to borrow the amount of money you need, when you need it, absolutely essential for budding entrepreneurs.
To judge how much they are willing to loan out, lenders use your credit scores as an indicator of how likely it is that you and your business will be able to repay what you owe.
In this article, we’ll discuss why personal credit matters for aspiring entrepreneurs, the negative effects of bad business credit, and ultimately, how credit can make or break your startup.
Why Personal Credit Matters for Aspiring Entrepreneurs
Generally, if you’re an aspiring entrepreneur who hasn’t launched a business yet, your personal credit history will be checked when you apply for a startup loan. After all, what better way to assess your ability to pay than by looking at your personal credit score, right? Unfortunately, many first-time entrepreneurs make the critical mistake of thinking that their personal credit won’t affect their startup.
Poor personal finances and credit scores can lead to several problems. Your loan application can be rejected. You might get a higher interest rate if your application is approved. Worst of all, there’s the possibility that you won’t be able to launch your business in the first place.
Ultimately, having bad credit can make it harder (and sometimes, impossible) for you to achieve your startup dreams. Bad personal credit often leads to rejected loan applications, high-interest rates, and a host of other problems. It might even force you to completely abandon your startup idea before it even gets off the ground.
That’s why it’s important to improve your personal credit score as much as you can before you strike out and launch that startup you’ve always dreamed about.
Bad Business Credit: 3 Negative Effects
If you’ve managed to launch your startup (congrats!), but you’re looking for more funding, then your business’ credit history will be checked instead.
You may already know this, but it bears repeating: Bad business credit can affect your life in numerous ways – and it can affect more than just your personal finances. If you’re an aspiring entrepreneur, you should know that both your personal and business credit score can affect your financing needs.
So, what are the negative effects of bad business credit?
1 - It can hurt your ability to secure a loan.
Having bad credit can hurt your ability to secure a loan or financing. Much like with personal credit, business credit is one of the first things that lenders look into when determining your eligibility for a loan.
While your credit score doesn’t have to be absolutely flawless, a credit score that’s too low can make lenders second-guess your ability to repay your debts. This can ultimately affect whether or not your application gets approved. A poor business credit score may also eliminate some loan options. Further, while there are some lenders who offer bad credit loans, they may be subject to higher and less appealing terms.
2 - It can cause issues with suppliers, vendors, distributors, etc.
Another negative effect of bad business credit – one that most entrepreneurs don’t consider – is that it can cause issues with suppliers, vendors, and distributors. Depending on what your startup does, your credit score may affect your ability to operate your business and order much-needed supplies and inventory.
For instance, many real estate and utility companies will look at your credit score when determining your ability to open an account with the electric company, rent office space, and more. If you have a bad credit history, these companies may even ask you to pay an additional deposit, or worst-case scenario, they may refuse to work with you outright. Distributors and suppliers might also be wary of doing business with you, especially those that sell raw materials and/or inventory either in installments (due to the high cost) or on credit.
Moreover, having bad credit may make your startup less appealing to potential investors, business partners, and suppliers looking for financially stable business relationships.
3 - It may force you to abandon your startup idea.
Ultimately, a lack of funding and capital can force you to abandon your startup idea. After all, how can you launch your business if you don’t have the funds to actually get it off the ground? One of the biggest challenges facing any aspiring entrepreneur is getting enough capital to fund startup costs, such as licensing and permits, marketing, insurance, supplies and equipment, among others.
Without adequate financing, it can be very difficult to get your startup off the ground. While you can always try alternative financing routes, like crowdfunding, bootstrapping with your personal finances, or turning to family and friends, each of these options come with its own set of challenges, too.
How Having Good Credit Can Help You Launch or Expand Your Startup
A strong credit score (both personal and business credit) can make it easier for you to launch or expand your startup.
With a good credit score, you can get approved for a startup loan, secure better interest rates, secure better trade terms with suppliers and vendors, and decrease instances where you have to pre-pay for a specific service or product, as opposed to having bad credit. In the long run, this will help you access the funds you need to grow your business, keep cash flow fluid, save money, and stay operational.
Having good credit is a great foundation for a successful startup.
You can improve your credit score by keeping your finances – both personal and business – as healthy as possible. Review your credit reports regularly and report any errors immediately. Always pay your bills on time. Consolidate your debts. Don’t use all your available credit (unless absolutely necessary!).
As you strive to launch your startup, attain good credit, and reach financial stability, try to keep Will Rogers’ words in mind:
“Do the best you can, and don’t take life too seriously.”
Do the best that you can and try to have fun along the way. After all, you’re taking the first step to fulfilling your dream of launching your very own business, make sure to enjoy every moment!
About the author
Sharita Humphrey is an award-winning finance expert and money mentor. Once broke and homeless, Sharita knows first-hand that financial freedom has a blueprint. As a former state government auditor and tax representative, Sharita left the security of a government job to pursue her dream of helping individuals change the financial trajectories of their lives and businesses.
As a certified financial educator, Sharita helps entrepreneurs learn the basics and intricacies of
creating, managing, and growing their businesses. Sharita was named the 2020 National Financial Educator of the Year for her work within her local community and across the country. Sharita recently expanded her educational services internationally, collaborating with the U.S. Embassy in Namibia to educate entrepreneurs in Africa.
Sharita is a media maven, providing regular editorial contributions to entrepreneurial publications and organizations including the blog for America’s Small Business Development Centers. She has been featured in top-tier media including CNBC, iHeartMedia, Forbes, Yahoo! Finance, and BBC World News.