If you run a small business, you know that opportunity can be around the next corner. When opportunities show themselves, one of the big factors that typically comes into play is capital. Having the money to take full advantage of any positive situation for your business can be a significant barrier. Many will turn to apply for business credit, but there is one thing that they overlook when they do so — their own personal credit.
Why is your personal credit important?
As noted in the article “Need Business Credit? Build Your Personal Credit First,” it is extremely difficult to get business credit based off of your business’s credit profile. The only rare exception when one may be successful in achieving such a feat would be if you run a very large operation. Entrepreneurs that have created a startup will quickly find out that if you want to get a business credit card or a small business loan, lenders will need a personal guarantee. That means you need to pay special attention to your personal credit.
Ways to improve your credit
If you do not already know your personal credit score, then you should start there. If your score is poor, then you will need to improve this first to increase your chances of getting approved for a business loan. The number that you need to hit is a FICO score of 700. If you are below this threshold, then you will need to improve this number.
One of the first steps you can do to ensure that your credit score improves is to pay down your debts. If you have maxed out credit cards, pay down these first for their interest rates are typically higher than loans. You may be able to consider consolidating this debt into a loan to get a reduced interest rate.
Another way to make sure that your credit score does not get negatively affected is to pay all of your bills on time. This, coupled with you paying down your debts will help you keep a strong credit score and put you in a better position to get approved for that business loan.
You should also open a separate business checking account. Doing so will allow you to differentiate between business and personal finances, as well as protect yourself from any financial liability relating to your business. To do this, you will most likely have to get an employer identification number (EIN) for the bank, which you can apply for through the IRS.
Create a plan of attack
Once you have figured out what your credit score, you need to create a plan to improve it if it is poor. Establish which debts you may be carrying have the highest interest rates, and pay those down first. At the same time, you should limit your credit card usage. In doing so, you can ensure that your credit score will be high enough so that you can be ready when a business opportunity arises.