Start building your credit identity now

Why do I Need a Good Credit Score If I Want to Start my Own Company?

Starting your own business is exciting. You’ve broken free from the 9 to 5 grind and are starting your own venture. But, you’ll need capital. Do you have it? If not, you may need funding and funding requires a good credit score.

In a Nutshell: Maximize Your Credit Score to Start a Business

It sounds crazy, but you need a good credit score to start a business. You are starting with nothing – a bank needs to know that the person borrowing the money has what it takes to pay it back. Because your business doesn’t exist yet, there’s nothing there for lenders to assess, which is why they turn to your personal credit score. Consider the following:

Ready to learn more about why your personal credit score is so important when you start a business? Keep reading below.

Table of Contents

Why is Good Credit Important to Start a Business?

You may think that applying for a business loan has nothing to do with your personal credit score, but it does. It’s still YOU taking out the loan. It’s still YOU responsible for paying the loan back in full. You can see why lenders would pay close attention to your personal credit score, even if they do use your business credit score (when you have one).

If you’re just starting your business, it doesn’t have a business credit score. This puts even more emphasis on your personal score and the reasons why it must be a good score. Lenders know that you need the money to start up, so they need to know that you are a good borrower that has good financial responsibility. If they gave money to just anyone – banks would be out of business pretty fast.

What is a Good Credit Score?

Knowing that you need a good credit score to start a business begs the question, ‘what is a good credit score?’

The answer varies by lender as each lender has its own requirements. In general, though, credit scores fall into the following tiers:

Do you need ‘excellent’ credit to get a business loan? You probably don’t, but you should fall somewhere in the ‘good to very good range.’ If you are in the ‘fair’ range, you may find some possibilities, but typically at much higher interest rates and fees.

Again, each lender has its own requirements. It’s important to shop around and see what lenders require. Having a good understanding of what lenders need will help you determine where you stand, what you need to improve, and how hard it may be to get the funding to start your business.

What Will Good Credit do for Your Business?

Lenders look at your personal credit score to determine your financial responsibility. How well do you manage your debts? Do you pay your bills on time? Do you overextend yourself financially?

If your credit score and credit report show poor use of your credit, you may not be a good candidate for a loan to start your business. Of course, your credit score isn’t the only factor lenders consider, but it’s one of the first.

If you have a good credit score you’ll likely get:

If you have ‘bad or poor’ credit, you may not be able to borrow as much as you need and it will likely cost you a lot more. Lenders may charge higher interest rates or charge more fees. They may also give less lucrative terms. For example, you may only be able to secure a short-term loan with a balloon payment rather than a longer-term fixed-rate loan.

What is Your Personal Credit Score Made up Of?

If you’re thinking of starting a business, it’s crucial that you maximize your personal credit score. Knowing what makes up the score can help you maximize it.

Your credit score includes the following:

What Else do You Need for a Loan to Start a Business?

As we said above, your credit score isn’t the only factor lenders look at when approving you for a loan to start your business, but it’s the first. Always work on your credit score and credit ‘thickness’ first. If you don’t have enough credit, consider a credit builder service to beef up your credit so that the credit bureaus can give you a score.

Applicants without a credit score at all have a very slim chance of securing approval for a loan to start a business.

In addition to your credit score, lenders often look at:

Bottom Line

Starting a business is expensive and chances are that you’ll need help getting the capital. It’s important that you maximize your personal credit score as one of the first steps to getting the funding you require. Without a good credit score, you’ll have limited options, not to mention expensive options that may be out of your league. Take control of your credit score right away!