Owning your own company is rife with risk, drama, and uncertainty. It can also be incredibly rewarding. To achieve a certain state of success, however, your funding has to be in order, and –whether you rely on money from angel investors or a traditional bank – your credit will need to be rock solid. So, what are some of the largest issues keeping business owners from the money they need to start, run through a tough time or expand when successful?
There are unique reasons why your business may not qualify for funding, but not having a handle on your credit can negatively affect your chances of achieving your dreams. In a recent survey conducted by Nav, 26 percent of business owners avoided hiring and expansion due to the frustrations that came with trying to fund growth. Rather than waiting until conditions aren’t favorable for funding, check to see if you’re guilty of any of these common business struggles. These top obstacles may be separating you from your ultimate funding goals.
1. Not Having any Credit
We all have personal credit histories – even if it shows that we haven’t established much of a record. Personal credit isn’t the same as business credit, however, and if you haven’t taken the proper steps to ensure that your business transactions are being counted in your new business history, you are missing an opportunity to establish a business credit score.
2. Not Knowing How Credit Scores Work
If you think that having a score of 180 is terrible, think again. Some business credit scores are handled by different vendors and entities than those that handle personal scores. Their model is different, and getting a 160 on the FICO SBSS scoring model can get you in the door at banks like PNC, RBC, and USBank. Not understanding how a business score is created can be detrimental to your business – and your future credit opportunities. Get educated on business credit scores before you apply for new credit, and check your business credit score for free with Nav.
3. Not Having Properly Registered Businesses
Do you juggle three or four different “side hustles” – all called different things with checks made out just to you? Are you on your state’s registry, but for an outdated business? Both of these situations can cause you not to establish and maintain the credit history needed to expand a business in the future. Your dog-walking empire should have its own DBA or corporate identity, and so should your consulting business. If you want them treated respectably by future lenders, you need to make this distinction now.
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4. Only Getting Approved for Sub-Par Credit Opportunities
If you run your business through some online payment gateways (PayPal, Stripe, etc.), you may have been offered some new forms of business “financing” that promise to help you grow your business with new funding. Read the fine print carefully. Many of these opportunities are available to anyone, have enormous fees attached, and take years and years to pay back. Unlike traditional lines of credit, they are extended to even the highest risk players. Even if your score is excellent, you can’t usually get ahead with these funding options.
5. Using Personal Credit to Fund Your Business
When you first start out, it makes sense to use your personal credit card to buy a plane ticket, purchase some office supplies, or even snag some inventory for your shop. After your business is up and running, however, you’ll probably start seeing offers roll in for cards under your business name. Take advantage of these opportunities – and seek some out if you’re not solicited. The only way to establish credit for your business is to take some out. Switch over completely to business-related credit as soon as feasible.
6. Missing out on Credit Card Perks
Business cards aren’t just wise for establishing your business’ credit reputation; they are a fantastic way to save money on services, get cash back, or save up some airplane miles. Like consumer cards, business cards work hard to attract the best clients. The more established you are as a business, the more perks you can take advantage of with a new business card. Shop around for the best deal and don’t be afraid to get a card for the perks. Many businesses leverage these extras to help their businesses run smoothly.
7. Becoming Entangled with Credit Downers
Are you in business with a spouse, brother, college friend, or parent? You better know what their credit looks like. While it’s possible for members of your business team to be financially “silent” business partners, and not have their name on anything you do, the better option is to go into business with partners that can elevate your financial risk profile and get you into more lucrative lending opportunities. No one’s saying that Uncle Lou can’t be part of your sandwich shop, but if he owes money, has a bad personal credit score, or is terrible at finances, it might be better to keep his name off records used to apply for and get funding.
8. Waiting Too Long to Access Credit
Many business owners mistakenly believe that credit is for a rainy day, an emergency, or when all other types of funding fall through. This can be dangerous thinking to a growing company, however, as often the best time to request funding is when things are going their best. By waiting until your prospects are bleak, you owe money, have dwindling assets, and are a bad credit risk; you have put yourself in the position to be qualified for the worst funding choices (if you qualify at all.) While taking out too much money for your needs may not seem responsible, consider opening a line of credit that you use sparingly (and pay down each month) so that you have it when you need it and can build your credit reputation in the meantime.
9. Relying Heavily on “Other” Funding
In a Kickstarter world, it can seem dreamy for business owners to start a campaign and get legions of fans to pitch in to fund your next gadget. While getting funded by fans, angel investors, and even relatives may seem like the least risky way to access cash, these methods don’t do much to establish your credit and can be hazardous to your overall growth plan. While traditional credit cards are relatively “strings-free”(and funds can be used how you see fit), many other types of funding can have stipulations on how the money is spent. Even if you have access to various funding sources, consider a credit line to keep a flexible funding option at your fingertips.
10. Trying to Hit Moving Targets
As your business grows, you’ll likely reach out to several “experts” to get advice on how to keep the financial core of your company strong. While there is no harm in learning some solid business skills, trends can change, and what was once recommended by a thought leader last year may be no longer relevant this year. Instead of continually trying to be the best at whatever is the latest “growth” strategy being sold today, consider taking a longer view of your success in the form of your business credit score. When checked regularly, you can get a more accurate picture of how your money is moving. The methodology that the FICO SBSS score uses to determine credit-worthiness, for example, reflects on your assets, employee ranks, and how well you manage existing debts. Since this target is the one that matters the next time you want to take out a million-dollar loan for a business expansion, it makes sense to keep tabs on it.
The unfortunate reality for business owners is that applying for new lines of credit can initially be largely hit – and miss. Decisions based on your business credit score don’t have to go into detail of why you were denied (unlike personal lenders, who are bound by law to let you in on the reasons for rejection.) That’s why a proactive approach is always best. By building business credit early, checking in on how you’re doing, and taking measures to have credit always available, you can save the struggles mentioned above for someone else.
Ready to see your credit data and start building better business credit? Check Your Personal and Business Credit For Free (No Credit Card Required).