How Bad Credit Can Affect Your Business

Bad credit can affect your personal finances in various ways. It can lead to higher interest rates on loans, limit your loan options, and much more. 

Besides your personal finances, bad credit can also affect your business. That said, here’s how bad credit can make running a small business more difficult.

Difficulty Getting Loans

Credit scores in the United States usually range from 300 to 850. Small business owners with good credit scores can easily access business loans compared to those with poor credit scores. While what’s considered a good credit score may vary from lender to lender, most lenders consider borrowers with credit scores of 670 and above as low-risk borrowers. 

However, according to Lantern by SoFi, some lenders offer business loans for bad credit like SBA loans to borrowers with less favorable credit scores.

Higher Interest Rates

Besides struggling to obtain business loans, borrowers with bad credit typically get loans at higher interest rates because they are considered a high-risk investment by lenders.

Higher Insurance Premiums

Unfortunately, bad credit isn’t limited to higher interest rates on loans, but higher insurance premiums too. Like lenders and financial institutions, insurance providers determine insurance rates depending on credit score. Business owners with bad credit usually pay higher insurance premiums because they are perceived as a higher-risk investment.

Difficulty Partnering with Vendors

Most reliable vendors and suppliers usually assess the credit scores of the business owners they partner with. Business owners with bad credit typically struggle to secure contracts with reliable vendors and suppliers. Consequently, they may be forced to work with unreliable vendors and suppliers who offer less favorable terms.

Higher Utility Costs

Business owners with poor credit tend to pay more for utilities such as electricity. Additionally, real estate companies may also charge business owners with bad credit higher rent for office space.

Strained Relationships

Bad credit can ruin a business’s reputation and affect personal relationships with partners. For instance, business owners who fail to make payments on time due to bad credit may harm their relationships with vendors, employees, and other people they rely on.

Stifled Growth

Bad credit inhibits business growth. It affects cash flow leading to challenges such as inadequate inventory. Additionally, bad credit makes it difficult for small business owners to obtain loans for activities like opening new offices or purchasing new equipment.

Difficulty Establishing a Business

Finally, bad credit can make it near impossible for a new business to get its feet off the ground. New companies require financing to cater for expenses like advertising and marketing, licenses and permits, inventory and equipment, office space, and much more. Without sufficient capital, aspiring entrepreneurs may find it challenging to kickstart their businesses.

Ultimately, bad credit makes it incredibly difficult to do business. Bad credit often leads to higher interest rates, trouble securing solid partnerships, and inhibited business growth. Worse still, it has forced many aspiring entrepreneurs to ditch their dreams of starting a business before it even becomes a reality. That’s why you need to work on improving your credit score before you venture into business.

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