In reality, businesses face several challenges, one being unable to get adequate financing for their operations. This is true, especially when the credit score is unfavorable. That said, several factors can affect a business or personal credit score.
These include payment history, the amount owed, length of credit history, and credit mix. All these factors can either have a positive or negative effect on your borrowing capacity.
So, if you’re looking to finance your business through borrowing, stick here for a few minutes. Why? You’re going to learn how your credit score can affect your finances. But before that, it’d be a good idea first to understand what a credit score is. Read on to get enlightened.
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What is a Credit Score?
This is a three-digit number that indicates individual creditworthiness. In other words, a credit score predicts how a specific consumer is likely to repay the borrowed money or pay for other bills.
That said, a credit score ranges from 300 – 850. A customer with a credit score of 300 is considered bad, while a consumer with a credit score of 850 is considered good or excellent. So, a higher credit score can allow you access to more loans and credit products.
How Can Your Credit Score Affect Your Finances?
Whether business or personal, a credit score can affect you in various ways. That said, here are some effects of a bad credit score on your finances.
1. You Might Not Get Any Loan
One of the major effects of a bad credit score is that it puts you at a greater risk to lenders. This means that no single lender will be willing to grant you loans.
So, a bad credit score can hamper your cash inflow, thus affecting your operations. This is true, especially when operating a financially distressed firm that requires an immediate cash injection.
Therefore, a bad credit score can limit your ability to pay your workers and other operating expenses. However, you can apply for personal loans for bad credit. This is a type of unsecured loan that can be granted to people with bad credit scores.
2. You Pay More Loan Interest Rates
Another major effect of a bad credit score is that it can attract more interest to your loans. This happens because most lenders consider you as a risk to their operations. So, they can deny you the loan or provide you with loans that attract high-interest rates.
That said, high-interest loan rates can increase your finance cost, thus impairing your overall business profitability. You can avoid this by boosting your credit score. For instance, you can improve your credit score by paying your loans promptly.
3. You Pay For Higher Insurance Premiums
Insuring business premises and workers is an important aspect that every business owner should strive to achieve. It ensures you can get compensated in case you lose your business through the fire, floods, theft, and other future uncertainties.
Besides, insurance helps avoid paying for damages if your workers get injured while on your business premises. All these helps minimize your overall business expenses to stay afloat.
However, you might not reduce your overall business costs if you’ve got a bad credit score. This is because most insurance firms consider credit scores before insuring their clients.
That said, a poor credit score can indicate that there are several lawsuits filed against you or your business. For that reason, if any insurance company finds that you’ve got a bad credit score, they can end up charging you higher insurance premiums than it should be. This also increases your cash outflow, thus reducing your business profits.
4. Pay More For Your Rental Business Premise
Another side effect of a bad credit score is that it can limit your chances of getting a commercial building to rent. This is because most landlords also check for the credit score of their tenants before allowing them to occupy the premises.
That’s why most landlords don’t allow any tenant who knocks on their doors to occupy their premises. And if they allow any tenant to occupy their buildings, they charge them high rental fees. So, if you’re looking to pay fewer fees for your commercial property, it’d be a good idea to do all you can to bring your credit score back into good standing.
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How Can You Fix Your Bad Credit Score?
As you’ve seen above, there are several ways a bad credit score can affect your finances. However, you can avoid that by boosting your credit score. That said, you can fix your credit score by:
1. Repaying Your Loans on Time
Repaying your loans on time is one of the most effective strategies to improve your credit score. It involves paying for your loans and other bills as they fall due.
That said, paying for your loans promptly helps avoid being reported to the credit bureau, thus boosting your credit score. You can achieve this by having automatic reminders or installing automatic payment applications in your business systems. This not only allows you to repay your loan on time but also helps avoid paying penalties that could affect your cash flow.
2. Limit Your Credit Utilization
Another effective way to improve your credit score is to limit the number of times you utilize your credit. For instance, if you’ve got a limit of $500 and you’ve utilized a quarter of it, then your credit score will be good.
For that reason, if you want to boost your credit score, be sure to limit its utilization. Besides, you can ask for higher credit limits which also helps boost your credit score.
Takeaway
When it comes to loan financing, a credit score plays a major role in determining whether you’ll be successful or not. A credit score is a 3-digit number, usually 300 to 850, that can depict your creditworthiness.
As you’ve seen above, there are several negative effects of having a bad credit score. For instance, it can limit your chances of getting any loan. And if you get one, you end up paying high interest.
Besides, a bad credit score attracts high insurance premiums and high rental fees. However, you can boost your credit score by repaying your loan on time and limiting your credit utilization.