Your Credit Score and Small Business
You might have heard the term before “credit score”, or perhaps it’s a brand new one for you?
Depending on your age, life or financial situation and a number of other factors, it’s quite likely that you’ve never had to worry about your credit score or credit rating. On the other hand, as an average Canadian it’s even more likely that you are or were extremely worried of your credit score on more occasions than you’d like to mention.
Your credit score is a number that is sort of hidden in the background for every Canadian. It’s a number that determines your financial responsibility or trustworthiness so to say.
GROW YOUR BUSINESS WITH GRANTS & LOANS
Learn about the funding available for your small business. It just takes a second!
As a young adult, your credit plays a major part of your obtaining a credit card, your first bank loan, line of credit, purchasing the first vehicle or first home. Anytime your financial status or character is called upon, your credit score or credit reputation is what determines your eligibility to move to the next step and for the other involved party to provide you the opportunity to obtain that credit card, loan, mortgage or something of value.
Most of the time you simply visit your bank and apply for a credit card with those amazing cash back dollars and you go home. A few weeks later, a credit card with a limited balance comes to your door and you simply have to call to activate it and it’s ready to use.
Or you find a car that you’d like to own, put some money down and you have to get a car loan to pay off the rest. It only costs you $180 per month, instead of paying the full amount at once. You enter the office, fill out an application, state where you work and maybe provide some pay stubs, and you’re done.
Sounds simple doesn’t it?
If this is your situation, you’re more likely to be the type of person who doesn’t ever really worry about their credit score or credit rating. Maybe you’re aware of it, maybe you don’t care, but usually it means you have a job, maybe a determined career, you pay your bills on time, don’t carry large balances, don’t have huge debt and you’re financially organized.
The reality for most Canadians is a bit different. Most Canadians live paycheck to paycheck, which means that borrowing is one way to get from point A to point B. It’s normal.
Everybody borrows. Be it from family or from banks. If you use your credit card, you are borrowing money that has to be paid back.
Looking at the average Canadian, 1 in 3 has had difficulty obtaining a credit card, a loan, line of credit, car loan and not to mention a mortgage.
Why?
One of the major factors starting off is how much money you make.
The banks and lenders first look at your income to determine how much they can give you.
If your income is below average, the amount you may be able to obtain from a lender may be below average. If your income is greater than the average, your chances of obtaining more money are much greater.
It makes a lot of sense actually.
Just put yourself in a situation as a bank or a lender.
If a stranger comes to you and asks for $5,000 and says they will pay you back in 3 weeks, but they only work part time at minimum wage, they simply don’t make enough to pay you back.
Now let’s say another stranger comes to you and asks for $5,000, shows you an income of $7,000 per month, offers collateral and a guarantee from a partner.
Who would you feel more comfortable giving the money to?
The banks and lenders do the exact same thing. To simplify the process, they rely on a rating system known as the credit score.
Your income is one of the major factors used to determine how much a bank or lender can provide, but it is not the only factor.
In fact, many high earning individuals often have very bad credit.
Factors such as your income, collateral, lifestyle, frequency of payback and more are what build your credit score and financial reputation.
Most people nowadays are tired of working for somebody else. They want to be their own boss and start their own business.
While starting a small business in Canada takes a lot of work and money, having a good credit score to get financing is critical to success.
This guide is dedicated to helping Canadians understand credit scores, starting a business, getting funding and more.
Most credit score guides are long and boring. This guide is written by small business experts and financing advisors based on questions from thousands of Canadians.
This guide will explain what a credit score really is, how it is calculated, why it matters, how it affects starting a business, applying for funding and how to improve it.
The information is simplified and easy to understand. Learn how your credit score works, improve it if needed and move on to building your business.
Read on to get started.
What is Credit Score?
Your credit score is an important aspect of your financial profile.
A credit score is a number or range of numbers that matters when applying for credit cards, loans, mortgages or even jobs.
In Canada, credit scores range from 300 to 900. The higher the number, the better the score.
An excellent credit score is considered to be between 800 and 900.
Credit Score Ranges
300 to 599: Poor – Poor credit means difficulty obtaining credit and shows financial risk.
600 to 649: Fair – Financing may be possible but often with higher requirements or interest rates.
650 to 719: Good – You are generally approved with standard conditions.
720 to 799: Very Good – Lenders actively seek you out with offers.
800 to 900: Excellent – Best rates and terms, though overborrowing can still be an issue.
How is Your Credit Score Calculated?
Your credit score is calculated based on your borrowing and repayment history.
- Income (indirectly)
- Total borrowed amounts
- Type of borrowing
- Payment history
- Balances carried
- Missed payments or collections
- Soft and hard credit checks
- Approved and denied applications
Credit Utilization
Your debt to credit ratio ideally stays under 30 percent.
For example, on a $10,000 credit card, borrowing $1,000 to $3,000 keeps you in a healthy range.
Credit Checks
Soft credit checks have minimal impact, while hard credit checks can negatively affect your score if done frequently.
Applying for credit more than once per quarter may be seen as risky.
Bad Credit vs Good Credit
Bad credit can limit access to financing, while good credit provides flexibility and lower costs.
Bad credit does not mean the end. Private lenders and credit rebuilding options still exist.
Starting a Small Business
If you decide to start a small business, your credit score will likely impact your financing options.
Starting a business requires time, effort, a solid plan and funding.
Needing Funding
- Know your credit score
- Create a business plan
- Understand your funding needs
- Know where to apply for financing
Government Funding and Credit Score
Government funding programs may still review your credit score but often focus more on your business plan, industry and location.
- Hiring and training staff
- Purchasing tools and equipment
- Marketing and advertising
- Leasehold improvements
- Improving cash flow
Government funding can be a valuable alternative where credit score may have less impact than traditional bank loans.