Whether one realizes it or not, one has a credit score. Some individuals proudly claim that they have never had nor used a credit card in their entire lives and always pay their obligations on-time or early. Those individuals still have a credit score and, sadly, it may be one that says no credit references available. A credit manager, for example, does not know much beyond what is reported. Avoiding the use of credit may have seemed a wise strategy at one time but today, creditworthiness must be well documented.
One entrepreneur may be asking, with enough angel investor funding, why the FICO score is so important. The implications of a business credit score are not all that different. The Small Business Administration cites inadequate or slow funding as the second most common reason for business failures. So, a look at what to do to maintain a good FICO score seems a useful path for this article to follow.
The same reasons a personal score can be to low to apply for a business score. Above all, assuming that business even has a credit source of some kind means late payments, a gradual increase of debt, low-income levels, or collections will taint the score. Having and using a credit source, paying bills on time, and growing a credit history are some major ways to combat a low score. Not only that, but the Small Business Administration also suggests checking a business score twice annually, first to look for and correct any incorrect or incomplete information, and, second, to guard against identity theft. Yes, it happens to businesses too.
What are the ways the FICO score affects a business?
A strong FICO score can provide leverage to an entrepreneur in negotiating payment terms. Think of one of the reasons for failure – slow financing. One angel investor may have every intention of providing support but maybe thinking six or ten months down the road.
Meanwhile, a new spring shoe or clothing item may be immensely popular. So, the entrepreneur uses a line of credit to ensure its dropship supplier will meet the need. The sales are steady but seasonal and may not keep pace with the need to use the line of credit.
The entrepreneur has every intention of paying but, until the angel investment comes in, there may be some late payments. It was just a bit late when a couple of them went out. Sure, they were made eventually because the owner knew he or she had every intention of paying. But a credit manager will not know that. He will only know that there were late payments. One does not often have the opportunity to explain circumstances.
An unimpeachable creditworthiness is especially important for a business doing or wanting to do drop shipping, an increasingly popular practice, especially for entrepreneurs who already sell online and want to increase the sales volume or expand the product lines because, not only will the credit score provide leverage in negotiating how much inventory to which a seller can expect to have access, but also the payment terms. A good creditworthiness rating will likely encourage a supplier or vendor to be more flexible, which is an angel kiss itself on seasonal business item sales. Book retailers are a good example. The industry has mostly three major spikes in sales annually with a slight increase for summer school. An entrepreneur looking to include college textbooks in his product line via a drop shipped platform would definitely need a supplier sympathetic to seasonal business.
Why Creditworthiness is Important to Angel Investors
Even with angel investors, incontrovertible creditworthiness is still important. On top of negotiating leverage with suppliers, investments may turn out to be less than anticipated for reasons beyond the control of the entrepreneur. Why put one’s own business at risk by depending entirely on angel investments? Why miss the chance to increase revenues on a new and popular item because the investment was slow coming or less than expected because one had not obtained a credit source and had not intelligently utilized it? Incidentally, the agencies that calculate business credit risk typically use a ranking of zero to one hundred with the higher the number being the lower credit risk assessment. Eighty is said to be a good rule of thumb.
While talking about cash flow and increased revenues, there are other ways a healthy FICO score can save entrepreneur money. Remember that “…N…” word? Popular or not, negotiations are a part of life and preparedness is…um… non-negotiable! When applying for a loan and not just a credit card, a strong score can enable a business owner to demand a favorable interest rate that might not otherwise be granted.
Insurance Agents Check Your Credit Score Too!
Some insurance agents will not even admit the truth of the matter but, for individuals, a personal credit score does affect insurance premiums because a poor credit score is, and has been for the last decade or so, thought to be an indicator of a likelihood to file a fraudulent insurance claim. The creditworthiness score can cost or save the business owner money regarding insurance premiums. And it may impact the ability to sell high-end or fragile or vulnerable items due to the supplier’s willingness to partner. Think about it. You are a supplier of gourmet food items. Economic profiling aside, would you rather ship food items to addresses in a rural trailer park on dirt roads with both wild and domestic creatures moving about or to a neighborhood of half-million-dollar homes?
Just to enucleate the point, a strong FICO score can help an entrepreneur grow his business by helping to overcome or avoid funding obstacles. Money saved means money available to increase or expand product lines, especially when a hot one needs to be added and a cold one removed. If you need even more help with your FICO score, click here now!
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