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Look after the pennies and the pounds will look after themselves.
In many cases, business startups need to raise money to get their operations off the ground. However, budding entrepreneurs often put off building their business credit rating. This can be particularly the case if their own personal credit rating is poor.
Personal credit relates to your own financial history. This encompasses everything from missed repayments, to failed credit applications, to court judgments. All these issues can influence your long-term personal credit rating. And when your personal credit rating is poor, it will be harder for you to access business loans.
There Is Another Way
Fortunately, there is an alternative route to secure funding. That is, you can focus on building up your business credit rating instead. Your first step toward building a business credit rating is to form a limited company. This creates a legal barrier between your personal credit history and your business’s credit history.
This will allow you to apply for business financing without lenders looking into your personal credit history. What’s more, it’s easy to register a limited company. In the UK, you can set it up directly with Companies House. Or you can use a company formations agent to act on your behalf. In the US, it’s equally simple. It’s called a limited liability company in the US, or LLC.
Here’s Another Option
Another simple way to build a business credit rating when your personal rating isn’t so good is to apply for a business credit card. The card is issued in the name of the limited company rather than an individual. If approved, the lender will give your business startup an immediate credit limit. They will also give you a minimum figure that you must repay monthly. However, as a limited company, you can typically negotiate higher credit limits than you could get as a self-employed individual.
When All Else Fails, Try This
However, sole traders with poor personal credit histories who need a short-term cash for business reasons can still get access to funds. Whether you need to purchase stock or invest in your digital marketing campaign, try applying for a bad credit loan.
Lenders often approve bad credit loans within an hour. What’s more, a bad credit loan can actually help you to repair your existing personal credit history. That’s because these lenders won’t necessarily take into consideration your historical defaults and failed loan applications. They will simply assess your monthly income and expenditures. This helps them to ascertain whether you can afford the repayments.
Here Are Some Other Steps You Can Take
If you are looking at building a business credit rating for your startup, think long and hard before making a credit application. This is because every application you make will be stored on your business’s credit report. And this is true regardless of whether they are successful. Credit refusals can be hugely damaging to your credit profile. Importantly, credit refusals can set you back many months in obtaining financing.
One of the main reasons UK lenders reject businesses for financing is because they have county court judgments (CCJs) against them. Court judgments in the US have a similar damaging effect on your credit rating. However, if you have a registered CCJ or a court judgment against you, don’t bury your head in the sand. In the UK, you can pay what you owe within 28 days. Then the judgement will cease to exist. It won’t even be recorded on your company’s credit profile.
In the US, pay off the judgment as quickly as you can. A paid-off judgment on your credit report looks much better to lenders than an unpaid one does.
Safeguard Your New Business Credit Rating
Once you’re lucky enough to receive business credit, it’s important to think carefully about the way you utilize it. Lenders appreciate it when businesses don’t max out their available funds. Therefore, try to stay well below 70% of your credit limit. Budgeting apps can be your friend here. They can help you to keep your overheads at a sensible level.
Once you have developed a positive business credit rating, you will be able to apply for business loans with lower interest rates. This will give you more room to breathe in the future.