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When you are considering a step in the entrepreneurial direction, it makes a big difference in your ultimate success if you come into the start well prepared. Part of that preparedness is not just with your business plan for success but it also has a lot to do with your own financial stability and credit score. If you are looking to add supplemental income or launch a brand new small business venture, you’ll need to have your own financial house in good order.

Why Do Credit Scores Matter to a Small Business Start Up?

If you are attempting a solo effort with your business idea, understand just how much that business will rely on you financially. Unless you are independently wealthy and plan to finance the business from the extra cash in your pockets, you will need to ensure you have a top-notch credit score before moving forward.

Some businesses will have low startup costs but nonetheless you still need to finance the promotion and advertising of your new venture. Individuals will often turn to family and friends for financial help but eventually most people will need to secure financing from banks or investors to keep growing. Without a good credit score on the part of the business owner, loan requests will either be hard to come by or substantially more expensive.

Lenders today not only want assurance they will be repaid in a timely manner, they also want proof that you are capable of paying. If you have a bad track history of repaying debts, your ability to get a loan may be a long shot. For those relying on that outside cash, a business idea may fizzle out before even getting started if financing can not be found.

Credit Scores – Getting Personal

Until a business entity has built up a solid reputation of its own, a small business financial profile will depend largely on that of the business owner. In order for a new business to get loans, a credit card, and even vendor accounts, the proprietor needs to prove financial reliability. This will be required until the business has been able to acquire financing of its own accord which can take years depending on profits. Applications for credit or financing will rely on your personal financial history including your income, your expenses, and your other debts.

Your credit score should be a priority when arranging your new business strategy. Not only does it have to be good to get you the financing and other services you need, it also has to be good enough to make you eligible for the best interest rates and deals for the financing you can receive. Otherwise, a low credit score will require a business shell out more cash over the life of a loan thanks to the high interest rates.

Start by eliminating as many personal debts as you have as soon as you can before getting your business wrapped up in your finances. This is a smart move for another reason – namely that a new business will not be able to guarantee you stable income right out of the gate. As your debt is reduced, your credit score will begin to move in an upwards direction. You must also ensure that you stay on track with all personal debt payments and continually make on-time payments each and every month.

Credit Scores – Watch Your Debt-to-Income Ratio

Once you have downsized your personal debts, it is key to remember that you need to add only reasonable and essential new debts to your personal portfolio. Even if the credit cards and loans are for the business, they are still listed under your name and you are fully responsible for the debts owed. In the event you need a personal loan for your own reasons outside the business, you may have effectively ‘maxed yourself’ out on the business front and therefore be ineligible to help yourself out financially.

At first it is typically a necessity to mix business funds with personal monies but you should also have a plan in place to eventually separate the two as time goes on and profits increase. Without this type of growth plan identified, you may become hard-pressed to find a balance between your business finances and your personal ones.

What is your view on credit scores when it comes to entrepreneurship?