The Canadian credit score scale runs from 300 to 900, with 650 widely regarded as the dividing line between a good credit score and a bad credit score. The average credit score in Canada is pretty good, ranging from 680 to 740. Unfortunately, many Canadians fall on the wrong side of the dividing line. Nearly 20 percent have scores that classify them as high credit risks, with 3 percent coming in under 520, making them extreme credit risks.
A bad credit score impairs your ability to get a mortgage, an apartment, a car, and even a job. If you’re a small business owner, having poor personal credit may affect your business in several ways.
Difficulty Obtaining Loans
Chances are, your small business needs to borrow money at some point in order to grow. If it hasn’t established business credit, then lenders will typically ask you, the business owner, for a personal guarantee. This involves using your personal credit to apply for small business startup loans and assuming personal responsibility if your business is unable to repay what it borrows.
With a poor credit score, your personal guarantee is unlikely to inspire confidence with most lenders, and therefore you could face difficulty obtaining loans to grow your business.
High Interest Rates
Even if you find a willing lender, chances are good the lender will charge your business a higher interest rate to compensate for the increased credit risk. A high interest rate results in high monthly payments and may contribute to cash flow issues down the road.
For example, a $100,000 loan with a 10-year term carries a monthly payment of $1,060 at 5 percent interest. However, at 12 percent, the monthly payment jumps to $1,434.
Trouble Attracting Investors
Maybe your solution is to eschew loans altogether and seek equity financing from qualified investors. The problem is, investors often want to look at your personal credit as well, and they use it to help assess the risk of your business folding.
Consider if you were thinking of investing in a small business. Wouldn’t it concern you if the business owner was saddled with unpaid personal debt and his or her company hadn’t yet gotten off the ground?
Poor personal credit can increase the overhead costs of your business and make it difficult to obtain basic services, such as a lease and utilities. Commercial landlords, like lenders, want to see your personal credit if your business lacks a lengthy track record. A bad credit score makes landlords less eager to rent office space to your business.
Other necessities, such as utilities and high-speed internet, are more expensive with poor credit. Providers may demand a hefty deposit to protect them if your business skips out on the bill. This can create cash flow challenges in the early stages of your business when you’re trying to grow.