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?
The Effects of Poor Credit
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:
- Loan and credit card accessibility. For starters, your access to loans and credit cards is going to be restricted. There are some credit cards you can get with a bad credit score, but you may face a higher interest rate or stricter terms and conditions. Similarly, you may not qualify for a personal loan, which may be necessary to get your business off the ground. In other words, your access to credit and/or liquid funds will make it much harder to build a business on your own.
- Funding accessibility. One of the most popular options for entrepreneurs is seeking funding from an outside source, like an angel investor or a venture capitalist. But these options may also be limited. Investors like to work with entrepreneurs who have a strong reputation and a history of demonstrated financial management capabilities. If they see a bad credit score when they run a background check, they may no longer be willing to work with you.
- Business partnerships and clients. Though somewhat less likely, it’s also possible that your prospective partners and early clients will run background checks on you—to make sure you are who you say you are, and to maximize their potential investment. A bad credit score can be an indicator of irresponsibility, or low trustworthiness, and can jeopardize the integrity of your team before you even build it.
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.
The Alternatives
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).
How Poor Is “Poor”?
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.
How to Build Your Credit Score
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.
