Starting a business is certainly no easy feat and most of the time, aspiring entrepreneurs need to secure funding in order to turn their business idea into a reality and get their venture off the ground. But since brand-new businesses do not have much, if anything, in the way of financial records for lenders to go by when deciding whether or not to accept a financing application, it’s often the business owner’s personal credit rating that ends up carrying a lot of the weight.
Other important factors such as the business plan, outlook, competition, and the market will be taken into consideration, but when it comes to making a decision, your credit score can either go in your favour or leave you without the funding that you need. Taking action early to improve your credit score can seriously improve your chance of getting the business funding that you require in the future.
Reduce Your Debts
Repaying as many debts as you can right now as a matter of priority helps you increase your credit score and become a more attractive borrower for both personal and business purposes. Start by repaying any smaller debts that you have in full. If your debts are made up of multiple smaller lines of credit or loans then it is worth considering getting a debt consolidation loan that provides you with the means to repay them all in full at once. This leaves you with only the debt consolidation loan to repay in one monthly payment, rather than several to juggle – and it could work out cheaper too depending on the interest rates.
You also have an option to file for bankruptcy. It will improve your credit score as some debts forgiven in bankruptcy will help reduce your debts, however, you have to wait up to 10 years before the record is removed from your report.
New Horizons offer short-term loans that can be very useful for consolidating debt, allowing you to repay the consolidation loan over a shorter period of time that will allow you to become debt-free quickly. New Horizons is a trusted credit broker working with a reputable panel of trusted UK lenders to help you find the best loan for your needs. Find out more here.
Check Your Credit Report
Knowing what’s on your credit report and where your credit rating stands is important for getting started with improving things. Being able to see what’s going on in your credit report gives you a better idea of what needs to be dealt with as a matter of urgency in order to start moving your rating up higher. Thankfully, checking your credit report is easier than ever with a number of free services provided by the various credit reference agencies to help you keep on track. You can sign up with a service like Experian or ClearScore to get regular updates on your score and customised tips for improving it.
Perhaps you’re not in a position where you can pay any of your debts off in full right now, but that doesn’t mean that you can’t speed the process up. Go through your monthly expenses and consider if anything can be cut down in order to free up more money to put towards getting your debts paid off quickly. For example, you might want to consider switching to a cheaper gas and electricity tariff, moving to a lower broadband speed at home if you are able to, or exercising at a cheaper gym for the time being so that you have more money to put towards paying off debts. This way, you don’t have to change your monthly expenses completely but rather readjust your budget to distribute the money differently.
Get Debt Advice
If you are seriously struggling with your debts then it’s best to deal with this before you consider starting your own business. There are plenty of services in the UK that offer free debt advice including charities like StepChange and the Money Advice Service where you can find useful resources and advice to help you get back in control, negotiate with your creditors and work out how much you can comfortably afford to repay.
Try the Debt Snowball Method
The debt snowball method is an increasingly popular way of clearing debts since it allows you to repay your debts starting from the smallest to the largest. Using this method, you should first clear any priority debts that you might have like council tax or rent arrears before moving on to the smallest debt in your name. Once this debt has been repaid in full, use the money that you would normally pay it with to pay extra on the debt that is next up in size, allowing you to get that debt paid off faster. As you move up the ladder to repay each debt you will free up more and more money to put towards the next one. As you focus on paying each debt individually, continue making the minimum repayment to all of your other debts.
Debt Relief Orders and IVA
A debt relief order or an IVA are typically last resort plans that are offered to people who are seriously struggling with their debt. If you are currently earning less than you are repaying to your debts, this might be an option for you to consider to help you get back on track financially before starting your own business venture. A debt relief order is typically granted in extreme circumstances to individuals with unsecured debts over a certain amount and will wipe your debts. However, it often comes with certain conditions, including the amount in assets that you are allowed to own for a certain amount of time afterwards. For example, if you get the debt relief order and then come into some money in the following months, you may be expected to use it to repay the debt.
Debt Management Plans
A less severe way of doing things if you are struggling with debt is to ask your creditors to put you on a debt management plan. You can do this by contacting your creditors yourself or if you are busy and have no idea where to start, there are companies that will manage your debt management plan and negotiate with your creditors on your behalf for a small fee. Interest and charges are typically frozen when you enter into a debt management plan and you are able to make payments that are comfortable for you over an agreed period of time until the debt is paid off.
Finally, if you don’t have any debt issues at the moment then your chances of being accepted for a business loan are going to be higher. But it’s important to ensure that you maintain your good credit score by being responsible with money. You may be surprised to hear that there are certain things that can affect your credit score that you may not have realised, such as making payments to your utility bills or broadband. Making these payments on time will help avoid any damage to your credit score, and getting on the electoral roll can also help. Check your credit report regularly to look for any mistakes or discrepancies that could be causing unnecessary damage, and keep your credit card balance at no more than 50% of the limit.
If you want to start your own business, there’s every chance that your personal credit score will be considered if you apply for business funding. These steps will help you improve your score and your chance of getting the business funds you need.