Financing is among the many elements that entrepreneurs have to think about when opening new ventures. Credit is one requirement that financial institutions and other funding options look at before they can agree to help. Both personal and business credit has an essential role to play when operating a young company.
A startup doesn’t have much of a credit history to speak of so an entrepreneur’s credit becomes the most critical aspect. Business credit takes time to build, which is why about 42% of small enterprises use personal credit cards. As an entrepreneur, you must dedicate sufficient attention towards improving your business credit, which may take a bit of time. Learning about the influences that credit has on a new small business will help understand why it’s a necessary investment.
The kind of credit that your business has will impact the opportunities available. Business credit has a higher capacity than personal credit meaning when you need financing the former is a preferable choice. Lenders will look at your company’s credit history in the time it has been operational and use that to determine your lending risk. The state of your credit history will convince or deter lenders from working with you because it represents your ability to pay. Besides influencing your eligibility for a loan, credit also plays a part in the type of rates lenders charge on interest. Good credit is a measure of reliability and will, therefore, generate good interest rates from financiers.
Personal credit may save your company’s financial health in the early days, but at some point, you will need to move forward. A poor business credit can keep personal credit tied to your business for a long item. If your credit is linked to the company, when something goes wrong like defaulting on a loan, it reflects on your credit history. Creditors can also come after personal assets in extreme cases where a business fails to meet its loan obligations.
Value of a Company
Credit is one metric that investors look at when gauging the worthiness of a small enterprise. Whether a company will be sold in the future or not, building value should be a priority for an entrepreneur. The best thing about credit is that it doesn’t go to waste – anyone who takes over the business inherits the credit history as well. Credit also dictates the growth opportunities that a company is exposed to. A new venture with a strong credit is more likely to receive the funds it requires for different projects. For these reasons, prospective buyers and investors respond favorably to startups with great business credit.
Some entrepreneurs may not realize it, but business credit is an asset. It influences the prospects you have with suppliers, vendors, and banks. With sound business credit, you can readily get the funds necessary to stay operational and grow.