We all know that good credit is highly sought after. And should we forget, those catchy little jingles are there to remind us, prodding with “free,” instant online credit reports. But once you find out what your score is, you may still be left wondering what exactly it’s good for, and more specifically, what does it actually mean for those who own their own business?
Your credit score is especially influential if you’re a small business owner. In today’s competitive market, poor credit can adversely affect your ability to conduct business in a number of ways: it can result in difficulty securing necessary financing and better interest rates, among other possible problems. Here is a brief rundown of some ways in which your credit profile can affect your business:
Surety Bond Premiums
Surety bonds act as risk mitigation tools to help ensure that business owners and other professionals follow all licensing requirements and industry regulations. Because a surety provider could potentially be liable for your inability to perform, they charge an issuance fee directly related to you credit score, which is usually a pretty accurate indicator of an individual’s reliability. Having a credit score above 700 will typically allow you to purchase a bond from a premium underwriter who can provide a bond at a competitive rate. Applicants with credit scores below 700 usually have to work with underwriters who will execute bad-credit bonds. These principals will pay a significantly higher rate that could range anywhere from 5 to 20 percent of the bond’s penal sum. Sometimes high-risk principals must also provide additional collateral upfront before securing the bond.
Because your ability (or inability) to pay off past debts in the past directly affects your credit score, banks heavily consider your credit score when determining whether or not to back you with a loan. If a lender does approve you for a loan, the interest rate you will pay on the loan will be directly related to your credit score. Typically, the lower your credit score, the more interest you will pay on the dollar. If you have a good credit score, you should expect to pay a much lower interest rate on your loan(s). Of course other extraneous factors may affect the interest rate you will pay, but your credit score is a major influence.
If you’re starting up a new enterprise with a partner or a group of peers, be sure to inquire into each of their personal and professional credit histories. If you cosign for a loan, the lender will consider the credit score of all signing parties. How your credit scores are treated for those going into business as together is similar to when a couple gets married and decides to take out a loan for a new home: the two credit scores are combined and then averaged to calculate an appropriate interest rate. Similarly, if you need to secure a surety bond that includes both of your names on it, the surety provider will consider both of your credit scores before giving you a price quote.
If you’re looking to purchase an insurance policy for your business or for your employees, your credit score will be taken into account so that the insurance agent can predict how profitable you will be and thus how likely you will be to pay your insurance premiums. Insurance professionals check your credit scores frequently, especially when it’s time for you to renew or change a policy. Thus, keeping your credit score in check is not only important for initial price quotes, but for maintaining your payments at low, competitive rates.
When it comes to starting up your own business, thinking about your credit score can be intimidating. But keep in mind that if you make wise and careful decisions ahead of time, you can use your credit score as a tool for your advantage.
This article was written by Kristen Bradley at SuretyBonds.com, which is an agency that issues surety bonds across the nation. SuretyBonds.com aims to help new business owners get their enterprises started off on the right foot. For more information on the surety bond industry, check out the Surety Bonds Insider Blog: http://www.suretybonds.com/blog/.