How Can Your Personal Credit Score Impact Your Business?
So you’ve finally decided to take the leap and make your foray into the world of business ownership. You are excited to hit the ground running and get things underway. You have your business plan and you are all ready to execute upon it. However, you don’t enough fluid capital to fully fund it. Therefore, you will have to finance some of your initial expenditures, in order to get started.
But just when you are ready to pull the trigger and arrange to finance your business, you hit one major setback: You just got denied for a business loan or credit card, that you had to apply for in your own name.
Obviously, when you are starting out you may find that you are going to need to fund basic expenses such as office furniture and equipment, your inventory and assets. You may need to fund leasing or rental agreements as well, for office space and equipment. But if you don’t have liquid capital available to invest, you are going to need credit.
Unfortunately, one misconception that many aspiring entrepreneurs may not realize (which may be one of the contributing factors why 90% of all businesses fail within the first year) is that when you, as the business owner, are applying for business credit, it still requires you to personally guarantee it.
Yes, you read correctly! Your personal credit is what is checked, in order to qualify you for a loan or a credit card in your business’ name. Otherwise, if it were possible for a new business owner to apply for credit purely in the business’ name and not their own, then anybody and everybody would rush to start a business, apply for credit, run up their credit debt, and then let the business fail, thereby letting the credit vaporize with it, leaving your personal credit score unscathed.
But such is not the case! Even though your business is a separate entity from you, and a business is supposed to protect you from other businesses “piercing the corporate veil”. As the business owner, you are the guarantor of your business. It is not the case that your business can establish its own independent line of credit, at least during the initial stages once it is just getting established.
If your personal credit score is in the gutter, then fret not. You can take various measures to improve it, such as by obtaining a secured business credit, which basically is a credit card whose credit line is equal to a set amount that you deposit. You can use this to finance your purchases initially, and over the course of time, your credit score will improve enough for you to open additional unsecured credit cards or to obtain business loans. The catch-22 is that you would need money to be able to invest in opening a secured credit card, which basically may be the same money you would have used to fund your business, if you had the funds available.
Another alternative would you to bring someone else, on as a partner or officer of your corporation, in exchange for the use of their credit to finance the business. This is somewhat akin to having a “cosigner”. Lenders will need an assurance that this individual has a significant stake in your company.
If you have less than stellar credit, then your only option would be to simply forego the use of credit and aim to grow your business slowly. This may require you to adjust your growth strategy, since you won’t be able to grow as rapidly as you had originally planned. But you should not let this slow down your momentum.
Later on down the line, once you are established and have some positive cash flow coming into your business, you may be able to get financing from a lender who doesn’t look at your personal credit score, but is willing to lend you money based on your company’s account ledger.
The bottom line is that you must take care of your credit. Indeed, this is indicative of the chicken-and-the-egg catch 22: If you have a poor credit score, and you are looking to start a new business just so that you can earn more money to be able to pay off your personal debts, you will ironically need good credit in the first place, in order to be able to grow the business.
Unless you are willing to try one of the options recommended above, be prepared to operate on a shoe-string budget, initially.