How your personal credit score affects your business
The proliferation of service providers and availability of data where you can check your personal credit score has resulted in your financial standing become significantly more important in your ability to operate a business. Even if you are limited company which effectively makes you (individual) a separate entity to your business, your personal credit score plays a large role in today’s setting.
Historically, it used to be more costly for companies to check the financial status of potential customers and even more expensive for an individuals, however access to such data has greatly increased over the years which has resulted in a reduction in costs. With lower barriers to acquiring such crucial information, credit checks are becoming more and more common prior initiating a relationship with new customers – this is especially so for small businesses as their credit score impacts their operations considerably more than larger organisations due to the size of their operations.
What is Your Personal Credit Score?
An individual’s credit score could be classified as a score or rating that is assigned to an individual based on their financial history – whether positive or negative. For example, as soon as you apply for any credit, such information is recorded in your personal credit history. This could be when you applied for a mortgage, took out a car loan, or applied for a credit card. Each subsequent credit application, whether successful or not, is added to your credit history profile and every action taken in the management of your credit is recorded like your credit limits and scheduled monthly repayments.
Your personal credit score provides an indication on how well you manage your financial obligations, so if you’re looking to conduct business with someone on credit terms, it will provide them with a clear view on your ability to service credit and the potential risks involved. Although the credit terms are extended to your business rather than you as an individual, having a low personal credit score will increase your perceived risk and reduce your overall ability to acquire credit.
How Does a Low Credit Score Affect Your Business?
There are two key areas of business operations that can be impacted by a low credit score in some way or another. These could include;
Lending – banks and other financial institutions, and maybe even potential investors, will see your business as high risk. This doesn’t necessarily mean you aren’t eligible for a loan or a line of credit, but you’ll most likely be charged a higher interest rate to cover the risk.
Credit terms – your creditors and potential suppliers may translate your low credit score into shorter credit terms or may even request a deposit or upfront payment – directly impacting cash flow.
Another potential, but not definitive downside is that you could miss out on work from government departments and large companies who may have a policy of not extending credit or doing business with entities and people who have a credit score below a certain number.
As briefly outlined, your personal credit score can impact your businesses ability to acquire credit, so even if you’re business has a strong credit score, a low personal score could severely impact the decision as to whether you receive credit or not.
Can You Improve Your Personal Credit Score?
There is not one single action you can take that will dramatically improve your credit score overnight – depending on your history and amount of debt, gaining an excellent credit score can take up to 10 years.
Do not let your business credit score slip while you work on your personal rating as some of your potential suppliers will work with your business score and not take your personal score into account. Be sure to keep all your business expenses separate to your personal expenses and operate separate accounts and credit cards for each.
Here’s a few ways to manage your personal credit score to improve it are:
- Make payments on or before the due date.
- Keep balances low.
- Only apply for credit when it is needed.
- Do not move debt around.
- Don’t close unused cards as a short-term strategy (your score can be lowered by having fewer open accounts with the same level of debt).
- Maintain a good credit utilisation ratio.
Maintaining Your Business Credit Score
You should check your business credit score periodically so that you’re aware of its position. Strong financial management should mean that effectively, your business credit score should maintain itself. This means managing your cash flow so that you are able to make payments to your creditors on time. It also includes making sure that your debtors pay you on time also. A debt management or debt collection company can help with this, and also help you assess the creditworthiness of your customers and any new customers – as credit checks work both ways!
About Marshall Freeman
Marshall Freeman is Australia’s leading debt collection and recovery specialists. Through servicing over 20,000 businesses throughout Australia for over 15 years, we have gained a reputation as an industry leader in providing financial information, knowledge and education for small and medium sized enterprises.