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How Startups Are Affected By Bad Finances, Debt Management, And Low Credit Scores

How Startups Are Affected By Bad Finances, Debt Management, And Low Credit Scores
What's new: K-Startup Grand Challenge 2020 for Australian/New Zealand Startups! More information here.

Credit is essential for any business because it enables you to buy inventory, even out your cash flow, and ensure your operations run smoothly. Without a loan, you may have to postpone buying inventory, making repairs, or paying employee salaries which can help your business in the long term. 

A loan can also help expand your business, buy new equipment, or open a branch in a new location. It provides you with the financial muscles needed to succeed. 

However, bad finances, poor debt management, and low credit scores can affect your business’s ability to get credit and expand. 

How bad finances, low credit scores, and poor debt management can affect your business

When borrowing funds for your business, the lender evaluates your loan application to assess your ability to pay. The lender may request a cash flow statement to assess the inflows and outflows against your declared income sources. Normally, they may require supporting documents such as receipts and tax returns to support your application. 

The lender may generate a credit report to ascertain your creditworthiness and how well you can manage your debts. Poor debt management practices can increase the cost of doing business.

  • Failure to repay your business loans on time can cause the lender to impose late repayment charges or penalties which can negatively impact your business cash flows. 
  • Persistent defaults can cause your lender to impose recovery action on you. It may involve the liquidation of assets or restructuring of the loan. 
  • A bad credit score could deny you funding and cripple your business’s efforts to get money to meet expenses. Also, even where funding is available, you may pay higher interest rates, increasing the business cost.
  • A bad credit score can make it more difficult to get favorable insurance rates for your business assets, such as motor vehicles, buildings, and machinery. 
  • Sometimes, it may lead to higher interest rates on business credit cards.

How To Improve Your Business Credit Score

There are steps you can take to improve your credit score. Check your business and personal credit score regularly to help identify any items dragging down your ratio. Pay your bills on time, including utility bills, loan payments, credit card bills, rent, and online loans.

Maintain a low credit utilization of 30% and below by borrowing only a small portion of your available credit lines. Another way to improve your credit score is to use a debt consolidation loan. 

Debt Consolidation Loans

If you have many loans, you can consider a debt consolidation loan, which involves rolling various debts into a single payment. It can work well if your loan portfolio has high-interest products like credit card bills. Consolidation of debt allows you to enjoy a lower interest rate and enables you to organize your finances. 

Stay disciplined with your loan applications, as every inquiry is reflected in your credit report. Many hard inquiries can harm your overall score.

Conclusion

Bad finances, poor debt management, and bad credit can affect a business in many ways. It can increase operating costs and deny business credit to meet its financing needs. However, following the above tips can help you improve your score and manage your debt. 

Workflow Podcast

The WorkFlow podcast is hosted by Steve Glaveski with a mission to help you unlock your potential to do more great work in far less time, whether you're working as part of a team or flying solo, and to set you up for a richer life.

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To help you avoid stepping into these all too common pitfalls, we’ve reflected on our five years as an organization working on corporate innovation programs across the globe, and have prepared 100 DOs and DON’Ts.

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