Know Your Credit
If you’re launching a business, it’s imperative that you know your credit!
Banks, credit unions, and other lenders use your credit score to help determine whether or not to lend to you. Basically, your credit score lets lenders evaluate your potential to pay back the loan, as well as your creditworthiness.
When you seek funding for your business, lenders will use your credit score to determine whether or not you qualify for a loan, the amount of the loan, and potentially the interest rate as well.
The higher your credit score is, the more likely you’ll be to get the loan and secure a lower interest rate.
Your credit score is mostly based on your credit report information, which is maintained by the credit bureaus (the biggest three being Experian, TransUnion, and Equifax). These credit bureaus collect information about your history of borrowing and repayment and compile your credit report.
What’s On Your Credit Report
Under the Fair Credit Reporting Act (FCRA), you can obtain one free credit report each year from the three main credit bureaus. Your credit report is divided into four main sections: identifying information, credit history, public records, and inquires.
1. Identifying Information
This section includes identifying information like your name, address, and so on. Review this section to make sure all of your contact information is up to date. Report any inaccuracies you find to the credit bureau in question.
2. Credit History
The Credit History section contains the names and account numbers of all of your creditors (the account numbers may be encrypted for security reasons).
For each account, there will also be a record of when you opened the account, what kind of credit it is (installment, revolving), whose name(s) the account is in, the total amount of the loan, how much you owe, the status of the account (open, inactive, closed, etc.), and your payment history.
3. Public Record
This section of your credit report contains financial-related data like bankruptcies, judgments, and tax liens.
4. Inquires
The Inquires section is divided in two parts: hard inquires and soft inquires. A hard inquire is initiated by filling out a credit application, while a soft inquire is from companies looking to send promotional material to a pre-qualified group, or from a current creditor who is monitoring your account.
Your Credit Affects Your Ability to Secure Funding
It can be hard for start-up owners to qualify for financing like business loans, business credit cards, or lines of credit, because banks are hesitant to lend money to businesses that don’t have an established credit history. That means most lenders want to see solid evidence that they can rely on you to repay the debt.
Since your business doesn’t have a credit history for lenders to look at, many lenders will look at your personal credit history instead.
If the people running the business have good credit, the lenders can reasonably assume that they will be just as responsible managing their business credit.
In addition, some financial institutions will require new business owners to personally guarantee the business loan they are applying for. That means the business owner backs the loan with their own personal assets. If the business defaults on the loan, the business owner as an individual is then responsible for the debt.
If you have bad personal credit, however, most financial institutions won’t approve the loan or line of credit.
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