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Opening a new business is a life-changing decision. You have to commit to a significant amount of work in a short period of time, and you will need enough funding to get the ball rolling. However, a poor personal credit score can prevent you from scaling as fast as possible.

The relationship between personal and business credit

When you start a business, you usually will not have a business credit score. This is not a problem for lenders if your personal credit score is 700 or higher. Lenders will initially use your personal credit score for financial products you will use for your business, but this will eventually change.

The longer you stay in business, the more likely lenders are to use your personal and business credit for business loans. While a bad business credit score will not affect personal loans, a bad personal credit score can affect business loans, even if your business credit is high.

Ideally, you will keep both credit scores high to keep your business finances equally high. Pay attention to the things that can negatively affect your credit score to avoid financial problems.

Understand what affects your credit score

Personal and business credit are affected by similar factors, but there are a few things that differentiate them. Here are some ways in which personal FICO and business credit scores differ:

  • Personal credit scores range between 300 and 850, while business credit scores range from 0 to 100. You need a minimum of 600 (personal) or 75 (business) to get a loan.
  • Consumer lenders use Equifax, TransUnion and Experian, while business credit uses Equifax, Dun & Bradstreet and Experian. FICO and VantageScores for consumers are standardized, while each business lender will use a different formula.
  • You can monitor your personal credit scores for free from multiple lenders. For example, you can use applications like SoFi to securely monitor your credit score. However, it will be difficult to find an application that allows you to view your business credit score for free at any time.

When it comes to the factors that make up your credit score, personal and business credit will not differ significantly. Here are the credit agreements between your personal and business statement.

  1. Payment history: Your payment history is a record of whether you pay your bills on time. It makes up 35% of your personal credit and varies for business credit.
  2. Credit utilization ratio: Your ratio is calculated by comparing how much revolving credit you had and how much you used. It makes up 30% of your credit.
  3. Credit history: Your credit history is calculated by looking at the average age of your combined accounts and your oldest account. It makes up 15% of your credit.
  4. Account mix: Your account mix looks at how many installments and revolving accounts you own and fills in a score. It makes up 10% of your credit score.
  5. Credit inquiries: Your percentage will drop if you do too many hard queries, but soft queries do not affect your score. It makes up 10% of your credit score.

Once you have obtained a business credit account, you should also consider business longevity, your annual income, assets, public records (for liens and judgments) and operational risk.

How a Bad Credit Score Can Affect Business Finances

If you consistently make poor lending decisions, your credit score will drop. Once that happens, you will have a hard time qualifying for financing, which could cost you your company.

1. Higher loan rates

A personal credit score of 699 or lower and a business score of 79 or lower will cause lenders to give you higher interest rates on loans. The difference between an interest rate on a good and a bad credit personal loan can be as low as 5% and as high as 36%, according to NerdWallet.

2. Low lending potential

A low credit score for banks indicates that you are a high risk customer. You will not have the same amount of access to low interest loans, and you may be denied certain financial products. This may make it impossible for you to purchase necessary equipment or other essential items.

3. High Insurance Rates

Insurance companies often interpret a poor business credit score with bad business practices, even if this is not the case. Either way, insurance companies will use this as an excuse to increase your rates to protect themselves. This leaves you with less money to spend in your business.

4. High selling costs

Sellers will not work with businesses that have a history of overdue or late payments. On top of that, sellers talk. If one seller knows you can not be trusted, it will not be long before the rest find out. With fewer options to choose from, you will have to be content with high supplier rates.

5. High utility costs

If you own an e-commerce or dropshipping business, high utility costs will not be an issue. However, if you own a warehouse to store your products, you will probably pay higher utility costs than the average business owner. These costs can start to accumulate very quickly.

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