It is no secret that having a bad personal credit score can wreak havoc in our lives and keep us drowned in high-interest rates on mortgages, cars, and much more. In addition to that, many people assume that having their personal and business credit scores separate means that their bad personal credit will not affect their chances of getting approved for a business loan. This is not the case, and most lenders’ first line of inquiry is your credit.
Why personal credit is important
Suppose you have never operated a business before or are an entrepreneur with minimum expertise. In that case, the chances are that the lenders will primarily inspect your personal credit history as you go through the application process.
After all, it is obvious to judge on this basis when measuring the risk of lending money to an individual, especially if the applicant has no previous business credit history.
Problems with obtaining a loan with bad credit
Bad credit equals many problems, whether that is acquiring a loan or starting up a new business and operating an existing one. Let us have a look at each problem in detail.
1. Problems with loans
Since banks have become less lenient with approving loans to the average person, you are more likely to turn to alternative lenders, which are not without their problems. To begin with, one of the main drawbacks of borrowing from nontraditional lenders is the price of relatively higher interest rates.
Even a small business loan is like any other investment; hence these external lenders still have to weigh the risks and rewards carefully. This is why lenders charge an interest rate as a fee for providing a service and measuring the risk the borrower poses. So if the lender perceives you as highly risky, they will charge higher rates.
2. Utilities and inventory issues
It is not just the lenders that will look at your credit before providing you a service, many other providers — such as suppliers — will assess your credit before doing business with you. For example, if you sell products, like a restaurant, you’ll need credit for food, drinks, and a host of recurring inventory. Your credit will be considered when requesting products, and/or services. Moreover, they may even ask you to make an advance deposit if you have a bad credit score.
3. Problems with starting up a business
Perhaps the biggest drawback of having a poor credit score is the difficulty of starting a new business. The biggest obstacle new startups face is the lack of sufficient capital. This capital is essential to pay for any licenses, equipment, supplies, marketing expenditures, employee wages, and more.
When it comes down to it, bad credit can be the biggest obstacle in the way of achieving your business or entrepreneurial goals. Bad personal credit can mean that you are more likely to be rejected for a loan application, or bear the burden of higher interest rates if you do get approved, along with problems of managing inventory and other costs. With that said, you must prioritize building and improving your credit score before you decide to obtain an external source of finance.