Credit scores, debt, tax issues, and other personal financial matters can hurt your business, so it’s important that you’re aware of them. In this post, we’re going to review how your personal finances can affect your small business.
1. Lenders Will Consider Your Personal Credit ScoreMany small business owners rely on loans and other sources of funding to start and maintain their operations. Cash flow issues, liquidity problems, or outstanding invoices might have you in a financial pinch, but a loan could help you survive tight times. When you apply for a loan, the lender will review your credit score, and if your score is low, it could prevent them from providing you with financing. Small mistakes can have a dramatic impact on your credit score. Perhaps you forgot to pay a credit card bill for several months. Even if it’s a small payment that you’ve missed, say $20 dollars, it’s going to impact your credit score.
Other Factors That Could Impact Your Credit Score:
- Having numerous active credit cards.
- Making payments late.
- Having too many hard credit checks.
- Having a credit utilization rate.
2. Personal Debt Can Impact Your Credit ScoreAs lenders examine your credit score, they’re also going to consider your personal debts. For one, personal debt is a component of your credit score, and high debt-to-income levels can negatively impact your score. However, if you’re making your payments on-time, you can still secure a good credit score even if you have considerable debt. Second, by examining your personal debt, lenders will be able to better determine your ability to make payments. If you’re over-leveraged and already have numerous payments to make, you’ll struggle to afford additional payments. Thus, even if you have a high credit score, if you have a lot of debt, lenders may not feel comfortable providing you with a loan.
How to Keep Your Debt in Control:
- Have a good grasp of your income, so that you can better understand how much you can spend and borrow.
- Look for ways to cut costs so that you can put this money towards reducing debt.
- Invest rather than spend. For example, purchase a house, instead of renting.
3. Your Financial Situation Could Impact SuppliersAs you likely know, suppliers will often extend credit to the businesses they work with. For example, if you run a grocery store, your suppliers may provide you with two months’ worth of credit for the goods you purchase from them. That way, you can sell the goods first and use the profits to pay your invoice. Some suppliers will examine your credit score and personal debt levels to determine how much credit to extend you. If you have high personal debt or a low credit score, they may be unwilling to extend credit or may ask that you pay your invoice sooner.
4. Tax Mistakes Can Create Numerous HeadachesFinally, taxes are a serious burden for small businesses and individuals alike. Not only can taxes be quite expensive, but they can be difficult to compile as well. Tax mistakes can create numerous challenges, such as:
- The IRS could file tax liens against your properties, including your business.
- You’ll accrue interest on any outstanding debts.
- In a worst-case scenario, tax issues could force you into bankruptcy.