They say, “It takes money to make money,” and most business owners find that to be true. No matter how leanly you try to run your company, you’ll need extra cash to invest and grow.
When you’re looking for funds, your credit score is going to be a significant factor. No matter how you go about it, whether it’s sitting down with a banker or completing a credit card application, your credit rating will be the first thing they look at.
If you have a low credit score, all is not lost. It doesn’t mean you can’t start a business. But it does mean that there are extra steps you have to take to prepare for launch and secure funding in the future.
Here’s what you need to know about your credit score and how to move forward if you’re struggling with funding.
What Causes Low Credit Scores?
People and organizations sometimes judge those with low credit, but many factors can cause a low rating. Perhaps you’re young and haven’t had time to build up any credit. Or you might have a lower income and have struggled financially.
Maybe something happened — a divorce or significant setback — that caused your credit score to tumble. Regardless, knowing what elements impact your credit score can help you get back on track.
The most important thing rating companies look at is your debt payment history. This accounts for 35% of your FICO score, which is used by most lenders. Making payments on time is the number one way to improve your credit.
Next, you’ll want to pay attention to how much of your available credit you’re using. For example, if you have $1000 in available credit and you’re using $800, you have an 80% utilization ratio. Using more than 30% of your credit hurts your score. Utilization is 30% of your rating.
The last three factors make up 35% of your rating. They are the amount of time you’ve had credit (15%), your credit mix (10%), and how much new credit you’ve applied for recently (10%).
How to Improve Your Credit Score
Now that you know the key factors that influence your credit rating, you can work on improving it. First, be sure to order your credit report from one of the three credit bureaus. Experian, Equifax, and Transunion will provide you with one free report every three years. By ordering one at a time, you can get one every year.
Check to ensure there are no errors in the report that might impact your rating. These include accounts that don’t belong to you, accounts listed as delinquent that have been resolved, and more.
Once your report is accurate, it’s time to build your credit score.
Work on Your Payment History
Making payments on time is essential, as it has the largest impact on your credit. If you can pay extra without putting yourself in a bind, do so — the more you pay, the more your utilization goes down.
However, don’t overextend yourself so that you end up needing to use credit to cover bills or expenses later in the month. Being wise with your payment plans will help you stay on track without needing to use more credit.
If you can ensure that your credit payments each month clear by the 15th, the credit bureaus will register both an on-time payment and a drop in credit usage that month — a double win!
Keep Credit Accounts Open
Many people pay off credit accounts and then immediately close them. They want to be done with them. While this is understandable, it actually hurts your credit score.
Keep credit accounts open even if you’ve paid them off. If it’s an older account, you’ll extend the length of your credit history, which boosts your credit score. No matter how old it is, having unused available credit improves your credit utilization, which is a significant rating factor.
If you pay off an account, pat yourself on the back and put the card away so you won’t be tempted to reuse it. But keep the account open to boost your score!
Keep Your Company’s Finances in Order as Well
While you’re working on your personal credit, you can’t overlook your business operations. The better you manage your company money, the more likely you are to qualify for additional funds when you need them.
Take advantage of accounting software to make keeping track of income and expenses easy. You can link your business bank account to the software so you don’t have to enter data manually.
Learn how to understand important financial documents, such as your income statement, balance sheet, and cash flow statement. You can work with a professional or outsource your accounting, but it’s vital you know what’s going on financially.
Finally, be sure you’re setting aside money for taxes. There’s nothing more frustrating than working hard all year and being socked with a huge tax bill. You can pay an estimated tax amount each quarter to stay caught up.
Build Your Credit to Grow Your Business
Having a poor credit score makes it difficult to qualify for additional funding when you need to grow your company. The good news is that there’s a lot you can do to make things better. Now that you know the factors that impact your rating, you can focus on those issues to improve.
As your credit rating improves, be sure you’re managing your business money effectively as well. Keep an eye on your financial statements, bills, and income. Use software and automation to ensure nothing falls through the cracks.
You can build a successful business, no matter your credit score. It takes time and dedication, so why not start today?
By Indiana Lee, BOSS contributor