How a High Credit Score Can Help You Start a Business

As much as we talk about the divorce rate in our country, the likelihood of your new business failing is actually higher than the likelihood of your marriage failing. Half of new businesses fail within the first five years, and 65% close by year 10 (your marriage only has a 41% chance of ending in divorce).

If either of these ends, it will most likely be for the same reason: finances, the No. 1 reason for both business failure and divorce.

No matter what industry you’re in, cash flow is known to be the lifeblood of your business. Reliable financing keeps the wheels turning as your business moves toward profitability.

Most business owners will need some kind of loan.

Some people will have personal income (or friends/family/investors) to fund a new business during the ugly duckling years. Others will need funding from the start.

If you need to finance your startup with a lump sum, such as renting a retail space or kitchen space, then you are considering small business loans. For things like inventory, you can get a line of credit from the supplier.

At a minimum, most business owners will need a small business credit card. It separates your regular business expenses from your personal expenses and is a reliable, reusable way to cover those expenses for a few weeks during periods of low income. And as a literal bonus, best credit cards for small businesses earn rewards for business purchases.

Lenders will want your personal guarantee

No matter what type of loan you rely on to start and build your business, lenders will want some assurance that you can pay them back. Often this will mean one of two things:

1. Pledge: Some small business loans will require collateral, such as equipment loans secured by purchased equipment.
2. Personal guarantee: A personal guarantee clause states that you take personal financial responsibility for the debt and agree to repay it even if your business fails.

Point one only works if you have resources to back it up. The second point only works when you have credit history to support this.

A good personal loan can grease the wheels.

When you apply for a business loan, you will typically also agree to a personal credit check. Lenders will check your personal credit reports to make sure you have a good history of repaying debts.

If you have a bad credit history—or, sometimes just as bad, no credit history at all—then you’ll have a much harder time getting approved for financing for a new business.

On the other hand, if you do Having good personal credit will make it much easier for you to get approved for business loans, credit cards, and even business leases. You will also have a better chance of getting low interest rates and large loan amounts.

The Easiest Way to Improve Your Credit Score

While good personal credit is usually required to get approved, most commercial credit accounts will not show up on your personal credit reports* once they are opened. So business credit accounts usually won’t help you build personal credit.

*Important: The exception is if you default on a business loan that has a personal guarantee. In this case, a defaulted account can and will show up on your personal credit reports and cause a lot of damage.

Instead, you’ll need at least one personal credit card to help you improve your personal credit score. If you’re having trouble getting approved, consider using a secured credit card (it’ll be easier to get).

Using a credit card to get a loan

Credit cards can be a good way to get credit if they are paid off in full every month. I suggest using the card to automatically pay a small monthly bill, such as a streaming service. Then set up your bank account to automatically pay off the card in full before it’s due each month.

Paying your cards on time and in full every month will create a positive payment history. You should see an improvement in your credit score in about six months after establishing only a positive payment history.