There is a common concern among entrepreneurs hoping to start a business – getting approved for a loan. And one of the key factors in getting approved for the loan you need is having a good credit score. Keeping a good credit history and having your finances in order might not be at the top of your list when it comes to starting a business, but ultimately, it will make the process so much smoother.
Unless you’ve inherited wealth or are starting your entrepreneurship journey after a season of significant financial prosperity, chances are you’ll likely need to borrow money at some point. Taking out a business loan can feel daunting and uncertain, especially if you’ve never borrowed money before. Fortunately, you can build strong credit over time that sets you up for success, and implement proven strategies to maintain your credit as an entrepreneur.
Here’s how to build and maintain good credit.
Prioritize Your Personal Credit
Michael Chancellor, a credit expert who spends his days rehabbing people’s scores and maintaining their records, says that many credit issues can be remedied by a straightforward focus on the basics.
If you’re just starting out, make sure that you build your personal credit. Start early, if you can, or start now if you’ve put it off. Some people avoid opening a credit card in order to avoid debt, but a well-maintained line of credit is key to getting the loan you need to start your business. And remember – time matters. Build up a reliable history on your accounts over time and watch your personal credit score soar.
Already Established? Clearly Delineate Business and Personal Expenses
If you have already begun your entrepreneurial journey, make sure your business expenses stay separate from your personal finances. This includes writing off lunch with a friend because you discussed your company for just a few minutes. It’s important to create boundaries and stay honest so that you can keep all of your finances above board.
Additionally, be sure your business is registered as an LLC, which will ultimately help you as your business grows, especially when tax season comes around. Having a separate business credit account will help you establish long-term credit in your company name and make sure you’ve kept accurate records of your business and personal expenses.
In a similar way, you should create a separate bank account for your business and open any other credit cards under that business as well. This can help track expenses, and keep them separate from your personal finances when calculating taxes and other financial elements of entrepreneurship.
Follow the 30% Rule
More than anything, remember this: keep your credit usage below 30%. That means, whatever your credit limit, only spend 30% or less on each card. If your credit limit is $1000, you should aim to keep your spending to no more than $300 a month on the card. Your personal credit score is a vital first step to beginning your entrepreneurial journey – make sure to treat it as such.
Make sure you pay for everything on time. This seems like a no-brainer, but it’s essential to have a record of on-time payments. If you are worried you might forget, set up automatic payments that will ensure that the minimum payment is paid on time every month.
If you’ve stopped using a credit card, think before you close that account. The number of accounts open can affect your credit score, so make sure you know what you’re doing before you close it out.
Similarly, monitor your credit score. Many banking and credit card applications give you a credit score update each month. Take that into consideration, and monitor it for any unexpected changes.
Whether you need advice on personal or business credit, find an expert who can help you make the best and most informed financial decisions. Remember this: it’s better to start out strong than to have to remedy issues later.
A strong grasp on fiscal responsibility will empower you to take risks and get future loans to grow your business.