3 Tips for Young Entrepreneurs on the Power of Credit Consistent on-time payments are usually more important than income.
By Jared Polites Edited by Heather Wilkerson
Opinions expressed by Entrepreneur contributors are their own.
In the United States, personal credit scores can have a massive impact on entrepreneurs and their businesses. Poor credit history can eliminate the ability to qualify for small business loans and important life decisions, like purchasing a home. For many people, navigating the world of credit can be daunting.
In recent years, it was estimated that over 26 million Americans do not have a credit score and 19 million have let their scores go stale. Unfortunately, personal finance is not something many people learn in school, but rather learn through personal journeys of trial and error. Thankfully, a new niche of savvy credit entrepreneurs has emerged on social media with a focus on educating people on the power of credit.
Related: These Credit Repair Specialists Tell 3 Steps To Repair Your Credit Score
Shawn Sharma, co-founder of Credit 101 and personal credit influencer, has dedicated the last three years of his life to helping thousands of people learn about credit, build their credit, and access the often exclusive financial services reserved for people with elite credit scores. His dedication has helped him amass nearly two million Instagram followers and, more importantly, help many aspiring entrepreneurs use credit to scale or start their businesses.
All of this was accomplished from humble rural beginnings in Alabama. Sharma learned the hard way during his time studying at Cornell that debt and credit can either be your worst enemy or one of the most powerful tools in an entrepreneur's toolkit. Here are three tips that Sharma shared to help entrepreneurs leverage and understand the power of credit.
1. Credit is a level playing field
One common benefit of credit is that the current credit system is largely transparent and fair. Everyone starts from the same place and can only build their credit score by being active and responsible participants in the credit system. Think of credit as a tool and a resource that can be extremely powerful for various use cases.
"It is critical that entrepreneurs educate themselves about credit and take a responsible approach to building their profiles," Sharma says. "The current credit system rewards reliability versus starting capital, where consistent on-time payments are more important than income. This means the average American can build stronger credit and amass more limits than a millionaire who does not make on-time payments and actively build their history."
Most experts recommend starting with one or two credit cards that can be used to make day-to-day purchases and paid off at the end of each month. As a person's credit history grows, their credit offers and limits will become more attractive. The most important part is becoming active in the system and having a plan to make sure credit works for you and not vice versa.
"A great way to build credit is to build relationships with local banks and business bankers, who can often go out on a limb and help in applications and underwriting," Sharma adds. He also emphasized credit is a long-term game and those who focus on consistent progress eventually build impressive limits.
Related: Help Build Your Credit and Savings in 2021 with This App
2. Take advantage of credit rewards
Even if your business is successful and does not need capital, an ingenuitive benefit of credit is the rewards system. American credit cards offer the greatest cashback and largest airline mile signup bonuses of any other country. Business owners can leverage these credit card rewards and cashback opportunities to gain more revenue, subsidize business expenses and gain access to services otherwise unavailable for most people.
Sharma explains, "For example, business owners that charge expenses to credit cards can quickly gain enough rewards to pay for travel, equipment, and other services. Many credit cards offer free travel and car insurance for business owners that travel often. Even just placing normal business transactions for a business that spends $100k a year on a high-end rewards credit card can lead to $1,000 to $4,000 in cash back or airline miles often worth much more."
New credit participants should make sure to read all of the fine print before signing up for credit cards to make sure they understand the interest rates and terms involved. Also, it is advised to spend time searching various sign up offers that typically offer enough bonus miles to use on a round-trip flight internationally. A great resource Sharma recommends for people getting started is The Points Guy.
3. Credit can replace most traditional financing
Entrepreneurs who have a decent credit track record can tap into various credit financing options. In many cases, using credit can help entrepreneurs remove the need of having to source external investors and offer enough runway to build and scale a profitable business. This is exactly what Sharma did starting in retail arbitrage and in his credit repair company that does over $10 million a year in sales.
"Credit can provide a bankroll for entrepreneurs to hit the ground running," he says. "There are many options now that offer low-interest rate capital, both in the forms of credit and cash, for entrepreneurs to leverage. In some cases, we have helped entrepreneurs with strong credit gain zero percent interest loans and lines of credit. This is what I have used in the past to retain 100% equity in my companies."
Related: When Are Personal Loans a Good Idea?
As with any financing option, credit financing can vary from provider to provider so entrepreneurs should be diligent in their research. The important thing is to look for terms that include reasonable interest rates and payback periods, as well as secondary benefits such as compounding rewards.
Disclaimer: The writer is a personal friend of Shawn Sharma and used this friendship to gain insights for this article. This article is educational in nature and does not represent financial advice. Please speak to your financial advisor or a credit professional before gaining access to and using credit.
