If you’re thinking of opening a business, you’ll have many things to consider. Your personal credit is inevitably going to be one of those things.
Even if you choose to launch your enterprise as an entirely separate entity, your name will be attached to it, and thus your credit score. It may not be something you want to think about, but you’d better be ready to handle the questions about your credit when they come.
You can still qualify for a business loan even if you have credit issues, fortunately. That doesn’t mean it’ll be easy. If you want to know how your personal credit could affect your ability to start a firm, below are some of the essentials.
Business Credit vs. Personal Credit
First, you should understand the differences between personal and business credit, and how your score will affect your ability to take out a loan.
Everyone who’s ever paid rent, run a credit card, paid a bill, or taken out a loan has a personal credit score. This score is a major indicator for banks about whether you’re apt to be able to make payments on a loan.
The score reflects your record on such functions as paying rent on time, meeting minimum credit card payments, and covering bills before their deadline. When you make a late payment or miss one altogether, it hurts your credit score. On the other hand, every time you meet a deadline, you improve your score.
Business credit is similar. Good credit allows you to take out loans from authorized lenders based on past financial performance. It differs in that it’s a separate rating that’s attached to your business entity with a separate tax ID number.
When Business Credit and Personal Credit Overlap
Once you’ve built up your business credit by paying your suppliers on time, meeting your monthly minimum payments, and showing a continuing profit, your business credit will be high and substantial. At that point, it’s not linked to your personal credit score any longer.
Many small businesses and startups are not able to establish business credit, however, and authorized lenders turn to their personal credit scores. Any time an entrepreneur applies for a loan without a sufficient business credit history, the lender will take a look at his or her personal credit. That can be harmful if your score isn’t solid.
How to Deal with a Bad Credit Situation
Fortunately, bad personal credit doesn’t mean you can’t take out a business loan. It simply means you’ll likely have a few more hoops to jump through. Here are a few suggestions for dealing with a bad credit situation from an entrepreneurial standpoint.
1. Try social lending sites. These often have lower standards for borrowing than physical banks, so it’s a good way to get a start on building good business credit.
There are also micro-credit organizations. As a part of the government bailout program for small businesses, these banks specialize in helping small firms to develop good credit that improves their chances of loan success.
2. Start with smaller loans. Instead of going for a major loan, focus on borrowing smaller amounts that can help to build credit toward a larger loan. For example, many equipment suppliers will offer loans without a credit check.
After you’ve taken out a few of these smaller loans and kept up with the payments, you may have enough accumulated business credit to apply for major financing. These are a just a few of many tips that can help you establish better business credit, and find financial success for your business.
For a thorough financial analysis, the best move is to discuss your current financial state with a consultant or an organization that can assess your personal credit and determine what to do to improve your score. By boosting your business credit, you can achieve a more favorable position with vendors and suppliers.
You’ll also be able to get better interest rates from lenders and banks, and increase trust in all your business dealings.