When it comes to running a small business, finances are essential. You need to be able to manage your expenses and make sure you’re making a profit. One of the most critical aspects of financial management is your credit score. A high credit score will help you get loans and lines of credit with favorable interest rates. A low credit score can limit your options and make it difficult to get funding for your business.
Maintaining a good credit score takes time and effort, but it’s worth it. There will be plenty of opportunities to improve your credit score throughout the life of your business, and some of them will include your personal decisions. Here are a few things to consider.
Getting Personal Loans
Life will require you to purchase many valuable personal assets like a home or a car. You’ll need a loan to finance these purchases, affecting your credit score. Before starting a business, you might have to secure loans to afford those assets. Running loans can improve your credit score, especially when you have a good credit history and make your payments on time.
The shelter will be necessary for your family, and a car is often required to commute to work. Your credit score will significantly affect the loan approval process, and the interest rate offered. Getting a Federal Housing Administration (FHA) loan with a bad credit score is still possible, but it will be more expensive. The same goes for an auto loan; you might get approved, but the interest rate will be higher than average. Once you have those loans, you can pay them on time, bringing your credit score high enough to qualify for a small business loan.
You can benefit from a small business loan with lower interest rates and better repayment terms. On-time payments on your loan will help improve your credit score, making it easier to get more loans.
Opening a Secured Credit Card
A secured credit card is one of the easiest ways to improve your credit score. It works like a regular credit card, but you’ll need to put down a deposit that serves as your credit limit. For example, if you deposit $500, your credit limit will be $500.
Using a secured card responsibly can help improve your credit score over time. Make sure you don’t spend more than 30% of your credit limit and pay off your balance in full each month. After using a secured card for six months to a year, you can try applying for an unsecured card with a higher credit limit. If possible, you can even get multiple credit cards.
Your credit score will continue to improve as you use credit responsibly. Once you have a good credit score, you can qualify for loans with better terms and lower interest rates.
Keeping Track of Business Expenses
Improving credit scores will require sound financial management. ne of the most critical aspects of financial management for a small business is keeping track of expenses. It is imperative when your budget is limited. Tracking your expenses allows you to see where your money is going and identify areas where you can save.
There are several different ways to track expenses. Some businesses use a spreadsheet, while others use specialized software. No matter which method you choose, make sure you follow all of your business-related expenses, including:
- Advertising
- Office Supplies
- Rent or mortgage payments
- Utilities
- Staffing costs
- Business travel
Keeping track of expenses can help you stay on budget and make informed decisions about where to allocate your resources. It can also help you make tax deductions come tax season. Tracking your expenses lets you see which ones qualify for deductions and submit the appropriate paperwork.
Creating Investment Strategies
Investing is one of the best ways to grow your business. It can help secure funding, expand your operations, and hire new staff. But it’s important to remember that not all investments are created equal.
There are many different investments, each with risks and rewards. You’ll need to do your research to find the best opportunities for your business. You might want to consider:
- Bonds
- Stocks
- Real Estate
- Private Equity
- Venture capital
Not all businesses will be able to take advantage of all investment opportunities. For example, if you’re a startup with limited resources, you might not be able to invest in venture capital or private equity. However, plenty of options are still available, like bonds and stocks.
The key is to find an investment strategy that fits your business model and risk tolerance. You can work with a financial advisor to create a customized plan for your business.
Final Thoughts
Improving your financial management skills is essential for any small business owner. By taking the time to understand critical concepts and implementing sound strategies, you can set your business up for success. Nearly all your financial actions, whether personal or business, will affect your credit score, making it necessary to find out how it works.
