Your personal credit history is treated as a quick reference guide for lenders to determine whether you are an investment risk. This score is used whenever you enter a private contract, such as a mortgage application, a private loan application, or even when you sign up for a mobile phone contract. Your score will be lower if you have not paid off your debts, met certain payment deadlines regularly, or struggle to make your tax payments. However, a business will often have a separate, business credit score to help you finance your operation. This is mainly used as a reference for potential investors or lenders to help them understand how well you can handle your company’s finances.
While it is important to keep on top of your business credit score, there are times when your personal score can affect your business. This can happen in several ways, but there are ideas that you can use to fix this issue. If this is something that concerns you, read on to find out more.
Why Do Lenders Look At Your Personal Credit?
Before discussing how your personal credit affects your business, let’s look at why a lender will need to consider both types of credit in the first place.
The main reason behind this approach is that most people will have similar personal credit and business credit scores. Therefore, it saves time only looking at one, especially if you haven’t operated long enough to provide an accurate history of business repayments. The second reason is that your personal credit history provides a footprint example of how you have handled money before. This means that new business owners or sole traders will find that their personal credit history is analysed before any lending decisions are made because it is a strong demonstration of previous credit activity. With that said, how can your personal credit affect your business?
Applying For Finance
A successful business does not spring up overnight. There are important decisions to make before you open your doors, many of which can determine how much you thrive in these early days. Of course, the biggest decision you will face is how to finance yourself. A first-time business owner isn’t likely to have built up enough of a business credit history. Therefore, many lenders will look to your personal history when you apply for a start-up loan.
There is no denying that you will struggle to qualify for the amount you need if your personal credit history is poor, and this can put your business plan back several years, especially if you are paying off a large amount of debt. However, some people can help you with no credit check loans.
A loan company like Sunny can look into no credit check loans for you to help you consolidate your debt quickly. They are an accredited body and, more importantly, a no credit loan like this can get your business running so that you can start building your own business credit score.
Higher Interest Rates On Business Loans
There are going to be times when your business needs a bit of extra financing to get over a specific hurdle. The perfect remedy for this issue is a quick loan, but this can prove challenging as mentioned above. However, people with a poor personal credit history can still be approved for a loan, but it will come at the expense of paying off instalments with a higher interest rate attached.
Your monthly profit margins are stretched thin enough when you are just starting out in business, and you do not want a high-interest rate dragging these figures down. The best way to shrink your interest payments is by paying off all your outstanding debts before you apply for the loan. If this is not possible, then you may want to consider making multiple payments a month to drive that rate down and pay off your loan much faster. A few months in the red is going to look a lot better to your investors than an entire year or more, so try to consolidate a payment plan that affects your monthly gains as little as possible.
Finding Suppliers
A reliable supplier can give you the good start that you need. These individuals are responsible for ensuring that you can continue to make your product to your schedule, so forging a strong relationship with a supply company is paramount. You never know, your repeat business may even result in a discount down the road.
However, building trust in business works both ways. Your suppliers will need evidence that you are a reliable investment, and poor personal credit may deter them from working with your business. There aren’t many ways to convince your suppliers to re-think their initial decision; however, you can improve your reputation. While you may not be able to work with the suppliers you wanted, paying off invoices early and staying out of debt with other companies will improve your standing in the business community. This reputation may even catch the eyes of other suppliers, making it more likely that they want to work with you in the future.
Taxation
Your personal credit history will not change the amount of business tax you owe each quarter, but you may find that you will incur penalties if you are not responsible for your tax payments. A person with poor credit can end up in this situation due to late tax payments or mistakes on their record. Therefore, the government can place more stringent rules on your business when it comes to the tax year.
For example, the government can place tax liens on any of your business assets until you have made amends on past payments or errors that are linked to you as an individual. This means that your personal relationship with the taxpaying authorities in your area is going to affect your business if you have poor credit. Make sure you get all outstanding tax payments sorted before you open your doors as you could find your business facing bankruptcy if these errors aren’t fixed.
It Works Both Ways
While it may sound unfair to those who want to start up a business, your personal credit will affect your ability to apply for and succeed in getting a business loan. However, you also find it useful to know that this practice works both ways.
A poor business credit rating may affect you in your personal life too, even if you have a strong personal credit score. Try to place both scores under one umbrella, and you will get a good idea of how lenders can view you as an investment opportunity. One bad score can instantly cancel out the stronger credit score, indicating that you are not a safe investment opportunity. Therefore, while you may think that you are operating in two separate worlds, the credit system views all your credit histories as one long story. This means that you must maintain a healthy score in both facets of life.
Conclusion
The concept behind credit history is a simple one to understand. The lower your score, the harder it will be to qualify for financial assistance and debt relief programmes. These consequences apply to both your personal life and business profile, and they often intertwine as you can now see. Try to be careful out there, and make sure that you have addressed any lingering personal finance issues before attempting to get your business started.
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