Starting a business is a dream for millions of Americans, but even if you have a great idea, your personal finances have the power to hold you back. Having a “fair” or “poor” credit score instantly disqualifies you from some financial options, like certain types of mortgages and loans, and might be a symptom of greater financial distress. Given that money and financial flexibility are so important to get startups rolling, is it even possible to start a business with a poor credit score?
Depending on the exact number and who you’re talking to, your bad credit score can haunt you in several ways as you try to start a business:
It’s also worth noting that credit scores don’t come out of nowhere. If you have a low credit score, it’s almost certainly due to a history of missed payments, defaults, or high levels of debt. In other words, it’s an indication of poor financial management skills---skills you’ll need if you’re going to be a successful business owner. Consider whether your credit score is a remnant of bad financial decisions you’ve since managed to overcome, or whether it’s an accurate reflection of your current abilities. If you don’t have your personal finances in order, you should probably work on them first; being a business owner will leave you financially vulnerable, so you need to be prepared to deal with those challenges.
There will always be exceptions to these rules. If you look hard enough, you’ll likely find a bank willing to loan you the money you need to get started, or an investor who’s willing to overlook your credit score—so long as you have good financial habits in place. But even if all these options are suddenly unavailable to you, there are options for you to build a business.
For example, you could restructure your business or choose a model that lends itself to low startup costs. In fact, there are dozens of business you could hypothetically start for $100 or less (which wouldn’t require external funding or a loan). You could also raise money from friends and/or family members (if you feel confident in the integrity of those personal relationships).
A credit score of 700 or higher is considered to be “good,” and most people have a score somewhere between 600 and 750. If yours is lower than 600, it may be a limiting factor in your business pursuits. If it’s lower than 500, it almost certainly will be. However, that doesn’t mean you have to abandon your dreams of becoming a business owner or automatically start pursuing one of the alternative financing methods listed above. Instead, you can work on improving your credit score so you can be in a better position.
To build a better credit score, you’ll have to work on paying down your existing debts; high debt ratios are one major reason why a credit score could fall. You’ll also need to commit to making all your payments on time and in full; with enough time, eventually, your timely payments will take precedence over any payments you’ve missed in the past.
The biggest problem with building your credit score is time. It takes a long time for your efforts to manifest in your credit report—oftentimes, months to years—so you’ll need to be patient as you restore your credit report to good standing. If you can’t wait that long, there are plenty of alternatives that can help you build a business as you put your personal finances in order.