Credit Scores suck. They're hard to see, understand, and maintain. They're also very important when starting a U.S. business. Our secrets to good credit are below.
Why they matter: As a business owner, your personal credit plays a significant role in the early days of your business's financial health and access to opportunities. Some folks are eligible for funding in every category except personal credit score, and we want to avoid that whenever possible.
A good credit score can help you:
Establish Trust with Lenders: When your business is ready to grow, you may need financial assistance from lenders or investors, who often want to check your personal credit history as an indicator of your reliability and trustworthiness. A strong personal credit score gives them confidence in your ability to handle loans or investment capital for your business.
Access Favorable Financing Terms: A solid personal credit profile can open doors to better financing options. Lenders are more likely to offer you loans with lower interest rates, favorable repayment terms, and higher borrowing limits when they see that you have a good track record of managing your personal credit. That means it's less expensive to get the cash you need to grow.
Open Business Credit Opportunities: Establishing and maintaining good personal credit is often a stepping stone to obtaining business credit. Building a strong personal credit history helps you qualify for business credit cards, lines of credit, and other financing options specifically designed for businesses. These tools can provide additional working capital, help you separate your personal and business finances, and establish a positive credit history for your company.
Strengthen Supplier Relationships and Partnerships: Some suppliers and business partners may review your personal credit when considering whether to establish a relationship with your business. Maintaining good personal credit demonstrates your financial responsibility, which can positively influence their decision to work with you. It's worth maintaining good credit to ensure you can work with the right partners, at the best terms, and sometimes even get credit from the partners themselves, all of which enhance your business's operational efficiency and growth potential.
Strategies to Increase Your Personal Credit:
Monitor Your Credit Report: Regularly review your credit report to identify any errors or discrepancies that might be negatively impacting your credit score. You can request free reports from the "Big 3" credit bureaus once per year (Experian, Equifax, + Transunion). Dispute inaccuracies by sending a letter to the credit reporting agencies to rectify any issues. OMG how? Click here for everything you need (instructions and a template below).
Pay Bills on Time: Literally always pay on time (+ don't bite off more than you can chew). Credit card minimum payments, minimum loan repayments, and utility bills should be on auto-pay or you should have reminders set up to ensure you don't miss something, hurt your credit, and get hit with late fees. You can use the Bags platform to track when your payments are due for credit cards and loans.
Reduce Outstanding Credit Card Balances: Try not to have more than 30% of your credit card limit outstanding at one time. This is called a Credit Utilization Ratio. A maxed-out credit card can hurt you, even if you make the minimum payment on time every month. Importantly, the utilization ratio is a calculation based on your total available credit, so you can sometimes get away with a maxed-out card as long as your other credit cards give you a credit limit cushion to keep you below 30%, just remember not to use those new cards. Better plan: keep an eye on your credit limit and outstanding balances every month in the Bags platform and do some quick math to keep yourself safe.
Limit New Credit Applications: Frequent credit applications can be seen as a risk by lenders. Only apply for credit when necessary, as each application can result in a small, temporary dip in your credit score. A Bodega Funding Plan can help you determine where to look for funding to increase your chance of success and reduce your total applications.
Maintain a Mix of Credit Types: Having a mix of credit accounts, such as credit cards, a mortgage, and an auto loan, can positively impact your credit score. pro-tip, most mortgages and car loans are compatible with the Bags platform, and you can keep an eye on them there too.
Establish a Lengthy Credit History: Time is an essential factor in building credit. Avoid closing old credit accounts, even if they're no longer in use, as they contribute to the length of your credit history. A longer credit history often works in your favor. Credit cards with no annual fee are a great tool for this, especially if you never use the cards (bury them in your sock drawer or something). Keep every credit card you have in the Bags Platform, even cards you never use.
Elevating your personal credit score is an investment in the success of your business. If you follow this guide, you should have no problem seeing a boost in credit that you can maintain over time.
We hope you found this guide helpful. If you have any questions or additional insights to share, please leave a comment below.
