Do You Need Good Credit to Become an Entrepreneur?

If you want to become an entrepreneur, you’ll need to think about your financial situation. It’s almost impossible to build a business without money, with the SBA estimating that it costs at least $30,000 to get most new businesses off the ground. On top of that, you may not be able to pull a consistent salary for the first few years of your business’s operation, making you financially vulnerable.

But beyond those considerations, is it necessary for you to have good credit before you become an entrepreneur?

The Benefits

Your FICO credit score is a number between 300 and 850 that estimates how trustworthy you are, from a financial perspective. It’s calculated based on a number of factors, including your payment history, your current standing debt, and how you’ve opened new credit accounts in the past.

If your credit score is high, you may be at a natural advantage as an entrepreneur, with the following benefits:

• Loan availability. When you have a high credit score, you’ll have a much easier time getting approved loans for your business. Banks see a high credit score as a mark of reliability, intrinsically knowing that the risk of you defaulting on your loan is very low. When you apply for a small business loan, your chances of succeeding will skyrocket with a high enough credit score.
• Loan rates and perks. On top of that, you may be able to secure even better terms for your loan. Mortgages and other loans have variable rates depending on the credit score of the borrower; if your credit score is high enough, you might be able to get more favorable terms, or a lower interest rate on your new loan.
• Financial stability. Having a higher credit score is also an indirect indicator of your own personal financial stability. It’s likely that you have little standing debt, and a strong history of paying your bills on time. That financial stability will help you survive the first several tumultuous months of your startup’s growth—especially if you have money in the bank.
• Attractiveness to investors. Finally, if you’re attempting to woo angel investors or venture capitalists, your personal credit score could play a significant role in persuading them. Strong credit indicates a degree of financial savvy, and a reliable history of making good on your debts and promises.

What If You Have a Low Credit Score?

So what happens if you have a low credit score? Does that mean your dream of becoming an entrepreneur is over?

Not necessarily. It’s possible to start a business with a low credit score, and even more likely that you’ll be able to build your credit score to a higher level. These are the possible strategies you can use to do it:

• Your first option is to start repairing your credit score, bringing it up to a more acceptable level for entrepreneurs. Your biggest goal should be reducing your debt—and the number of open accounts you have—as much as possible, funneling all your extra income to paying down those debts. You’ll also need to make sure all your payments are on time. If you’re still struggling, you can use a service like CreditRepair.com to improve your chances of recovering quickly.
• If you’re trying to woo investors or make a case for a business loan, you may need to find alternative ways to prove your reliability. For example, you may be able to justify a low credit score with a strong recent payment history, or use stronger personal references to describe your accountability.
• Find alternatives. If the loans and investments simply aren’t coming in, you may need to consider alternatives. Can you raise the money on your own? Can you tap into your personal savings? Can you bootstrap the project on a low budget?

Your credit score has a massive impact on your potential as an entrepreneur, whether you like it or not. It’s free to check your credit score, so consider using a score estimator directly from FICO, or generate a credit report from a third party service. The more you know about your own credit, the more you can do to start improving it.