When lenders look at your small business, they may see that the business is quite young and does not have an established credit history. Whether you are registered as a sole proprietor or incorporated business, it may take 2 or more years to establish a financial history for your company. This is one of the reasons your personal financial history is important. Lenders will look at your financial credibility as the business owner to determine if they can lend to you until your company becomes more established. Lending is discussed in more detail in Section 7. For now, it is important to know the basics of creating and reviewing your credit score.
Establish a credit history in Canada
You may have saved some cash to start your business, but at some point, you’ll need to purchase equipment or inventory from your suppliers, host a website or lease space for your business. In many cases your credit will be checked, and you will need to use a Canadian credit card. Banks will review your personal credit history when you apply for small business loans. It is important to have a good personal credit history before you start your business.
Even if you had an exceptionally good credit history in your home country, you need to have a Canadian credit history. A Canadian credit history lets financial institutions and other lenders determine if you qualify for credit. Credit history from your home country will not be taken into consideration in Canada.
Learn more about credit scores and credit reports from Equifax Canada.
How you can start building a good credit history?
- Begin to build your credit history as soon as you arrive in Canada.
- Start small and build carefully.
- Apply to a bank or credit union for a credit card.
- Use the credit card to buy things that will build your credit history. It is best to pay the full monthly amount by the due date to avoid paying high interest fees and keep a good credit history.
- After getting the credit card, you can apply for overdraft protection on your bank accounts and small lines of credit. Be careful with credit. Borrowing fees and interest payments can be high.
Your Personal Budget
Another reason to examine your personal finances is so that you have a good understanding of how much money you will need to draw from your company to support your own personal lifestyle every month. If you are starting a new business, you may need to rely upon your personal cash savings to provide you with income. It can take several months or even 1-2 years before your business becomes profitable enough to support you. During this time, you will rely upon your own personal cash reserves and any additional funds you can borrow. As your business grows, you can start to draw income from the business to pay yourself. Budgeting will be an important step as you start and grow.
Using the Government of Canada Budget Planner create a basic personal budget using your current personal income and expenses.