The Effect of Credit Scores In Your Business Success

Growing a business is challenging enough—your credit score shouldn’t make it harder. Yet, for many aspiring entrepreneurs, a low credit score becomes a significant obstacle. You might not realize just how much your personal credit score can impact your ability to secure the funding, partnerships, and opportunities you need to grow your business.

In fact, did you know that 80% of small business loan applications are denied due to poor credit? If you're hoping to turn your business dreams into reality, your personal credit score could be the deciding factor. 

Let’s explore exactly why your credit score matters and how you can improve it. We’ll also cover what steps you can take to secure the funding your business needs.

Why Your Credit Score Matters for Entrepreneurs

Over the past 17 years, since launching my first credit repair business, I’ve worked with thousands of businesses. One of the most common questions I get from new entrepreneurs is: What credit score do I need to start my business?

The answer is not always clear-cut. While the specific credit score you need depends on the type of business you’re starting and the kind of funding you're seeking, your personal credit will always play a role. Let’s break down how.

Lenders and Your Personal Credit Score

Here’s the reality: many lenders will look at your personal credit score when determining whether to extend funding to your business. Even though you’re seeking financing for your business, lenders see your personal financial behavior as an indicator of how reliable you’ll be as a borrower.

• A low credit score might prevent you from qualifying for loans or credit lines, significantly slowing down your business’s growth. Without access to funding, it becomes harder to hire staff, purchase equipment, or invest in marketing and growth opportunities.

• A high credit score can open doors. Lenders see a good credit score as evidence of financial responsibility, which increases the likelihood of securing funding.

Our advice: Aim for a credit score of atleast 720 or higher. This can significantly boosts your chances of securing not only loans but also better terms. Like lower interest rates and more flexible repayment plans. This can provide your business with the capital it needs to grow without being burdened by excessive debt costs.

However, if your credit score falls short of this mark, don't lose hope. Many entrepreneurs start with less-than-ideal credit, and while it may make things more challenging, it’s far from impossible to secure funding. You just have to be strategic about it.

Vendors, Suppliers, and Creditworthiness

It’s not just lenders you need to worry about. Vendors and suppliers often require a credit check before agreeing to work with a new business. These partners want to know if you’ll be able to meet your payment terms, and your credit score gives them an easy way to gauge that.

Even potential clients might look at your credit score before signing a contract with your business, especially if you’re dealing with large corporate accounts. A bad credit score could send up red flags, signaling unreliability.

How to Improve Your Credit Score

So, what if your credit score isn’t in the best shape? Don’t worry, you’re not alone—and more importantly, you’re not out of options. Improving your credit takes time, but it’s essential for positioning yourself as a trustworthy and financially responsible business owner.

Here are some actionable steps to improve your credit score:

1. Monitor Your Credit Regularly

You can’t fix what you don’t know. Start by regularly monitoring your credit report. 

By law, you're entitled to a free credit report from each of the three major credit bureaus—Experian, Equifax, and TransUnion—once per year.

Look out for:

• Errors or inaccuracies, such as misspelled names, incorrect personal details, or outdated information.

• Duplicate accounts, which often happen with student loans or accounts that have been sent to collections.

If you find any suspicious activity or errors, take action immediately by filing a dispute with the credit bureau. Even small errors can have a big impact on your score, so don’t overlook them.

2. Dispute Negative Items

Did you know that nearly 79% of credit reports contain errors? Negative items like late payments, charge-offs, and collections can drag down your score, but sometimes they don’t even belong on your report.

When you find errors, dispute them by writing directly to the credit bureau. Here's a quick guide to disputing negative items:

• Write a formal dispute letter, listing each incorrect item on your report. Explain why you believe each one is incorrect, and include any supporting documentation.

• Send your dispute to the appropriate credit bureau (Experian, Equifax, or TransUnion). Under the Fair Credit Reporting Act (FCRA), they are required to investigate the dispute and resolve it within 30 days.

If the dispute is resolved in your favor, your credit score will increase. However, it may take multiple attempts, so be persistent!

3. Pay Down Balances

One of the most significant factors in determining your credit score is your credit utilization ratio—the amount of credit you’re using relative to your total available credit. To boost your score, try to keep this ratio below 30%.

• Pay down high balances on credit cards or loans.

• Request a credit limit increase from your creditors. As long as the request doesn’t involve a hard inquiry, increasing your credit limit can lower your utilization ratio.

4. Keep Old Accounts Open

You might think closing old, unused credit accounts is a smart financial move, but it can actually hurt your score. When you close an account, your overall available credit decreases, which can negatively affect your credit utilization ratio. Additionally, closing one of your oldest accounts reduces your average account age, another factor that influences your credit score.

Pro Tip: Keep those old accounts open and in good standing to maintain a strong credit history.

Alternative Financing Options When Credit Is Low

Improving your credit score is a smart long-term strategy, but what can you do if you need funding right now?

Even with less-than-perfect credit, there are alternative financing options that can help you get your business off the ground.

Here are a few options to consider:

1. Microloans

Microloans are small, short-term loans designed for startups or small businesses. While traditional lenders may require a higher credit score, microloan organizations tend to be more flexible and focus more on your business idea and growth potential.

2. Crowdfunding

If your business idea has widespread appeal, you might consider crowdfunding as a way to raise funds. Platforms like Kickstarter or GoFundMe allow you to raise small amounts of money from a large number of people. The emphasis here is on your product or service rather than your personal credit score.

3. Peer-to-Peer Lending

Peer-to-peer lending platforms, like LendingClub or Prosper, allow you to borrow money directly from individuals. The lending criteria on these platforms are often less strict than traditional banks, making them a good option for those with lower credit scores.

4. Small Business Grants

While not always easy to secure, small business grants are another financing option that doesn’t depend on your credit score. Look for grants from government agencies or private organizations that support entrepreneurs in your industry.

What Lenders Look For Beyond Credit Scores

While your credit score is important, it’s not the only factor that lenders consider. Many lenders also evaluate:

• Your Business Plan: A well-detailed and researched business plan can sometimes help offset a lower credit score. It shows that you have a clear vision for your business and understand how to make it profitable.

• Collateral: Offering collateral, such as real estate or equipment, can increase your chances of securing funding. Lenders see this as a safety net in case of default.

• Business Revenue: If your business has already started generating revenue, lenders may overlook a less-than-ideal credit score if they see strong revenue potential.

Even if you can’t change your credit score overnight, demonstrating a solid business model, backed by market research and realistic financial projections, can make a big difference in securing funding.

The Impact of a Good Credit Score

A good credit score is about more than just securing financing—it’s also about building trust. Many investors, vendors, and clients view your credit score as a reflection of your character and financial responsibility. A high score can help you:

• Secure partnerships with key suppliers or distributors.

• Build relationships with investors who are willing to take a chance on your business.

• Maintain credibility with clients who trust you to manage their accounts and fulfill their contracts on time.

On the flip side, a low credit score can cast doubt on your reliability, making it harder to build the relationships you need to grow your business.

Final Thoughts

Your credit score can have a major impact on your ability to succeed as an entrepreneur. Whether you’re just starting out or looking to scale, it’s crucial to monitor your credit, dispute errors, and take steps to improve your score.

If you haven’t, consider using tools like Disputely AI now! Use it to monitor your credit and stay on top of inaccuracies. By keeping your credit in good shape, you’ll put yourself in the best position to secure funding and build lasting relationships in the business world.

Take Action Today: If you're serious about improving your credit and starting your business, try out Disputely AI for a free trial. Or, if you want to learn how to fix credit for others while building your own business, join our TEAM OF CREDIT REPAIR EXPERTS NOW! The doors are closing soon, so sign up now!