You have a vision for your small business or startup, but how do you bring that vision to fruition if your personal credit score is less than stellar? Establishing your business by filing an LLC is a great beginning, but if your financial history has had some bumps, you can expect a few additional hurdles along the way.
According to Experian, 45 percent of Americans maintain a “Very Good” or “Exceptional” credit score (740+), but the majority rate somewhere between “Good” and “Very Poor.” Fortunately, there are many ways to boost your credit score when starting a business.
Business Credit vs. Personal Credit
First, it’s important for those looking to start a business to understand that there are differences between personal credit and business credit. Business credit will impact your financial options after your business is established. Personal credit is what you bring to the table before you begin. Here are some considerations to keep in mind about your credit before you launch your business:
Your credit report and your credit score are two different things. You don’t have just one credit score; you have many. Your credit scores are based on factors such as the length of your credit history, how much you owe and your payment history. These scores are monitored by the three major credit bureaus that assemble the data into your credit report. This is why you may receive different numbers from different reporting entities.
Your personal credit and your business credit will be linked. Just as a lender will check your personal credit history before approving a business loan, once your business is established, your business credit will also be scrutinized whenever you make a personal financial decision. It’s important to monitor the information in each report to catch inaccuracies and make sure the data is up to date.
Do I Need a Business Credit Card?
The short answer is, “Yes.” A business credit card is key to moving your business forward and nurturing both your personal and business credit scores. Here’s what you need to know about starting a business account:
A business credit card is vital in maintaining the separation of personal and business finances. It’s important to establish your business as its own legal entity, and a business card will help you do that.
It establishes your business credit and can boost your personal credit. Most business credit cards are reported by the major credit bureaus, so if you have one and use it responsibly, it could give your personal credit a lift. It also gets you on your way to building your business credit.
It makes tracking business expenses easier. At tax time, you need all the breaks you can get. Having your business card will make it simpler to access the records of your business expenditures.
How Does My Credit Score Impact My Business Goals?
You don’t need any particular credit score to start your business as a legal entity, but the lower the score, the more challenges you’ll face as a business owner. What are those challenges?
Getting loan approvals becomes far more difficult. As of April 2020, the approval rating at major banks for small business loans has dropped from an all-time high of more than 28 percent to a disheartening 8.9 percent. The approval ratings are down across the board, and a lagging credit score won’t help your chances.
Low credit could damage business partnerships. You might find that vendors, suppliers and lessors are more reluctant to work with a small business that has little established business credit and poor personal credit.
Startup costs will be harder to cover. If you can’t get a loan, you may not be able to afford the cost of doing business or have adequate cash flow. The majority of small businesses (82 percent) fail because of insufficient or inconsistent cash flow.
I Have a Low Credit Score. What Should I Do?
Amidst the uncertainty of the current global environment, working on your credit score might be at the bottom of your priority list. However, these action tips can all be managed via phone or online, so now is actually the perfect opportunity to get yourself on the path to better credit. By following the points outlined below, you can be on your way to better personal finance, as well as a more successful business launch.
Seek out alternative lenders. If you think only big banks can provide the financial help you need, think again. There is a wealth of lending options out there, from small banks to microloans to crowdfunding and more. If a traditional bank isn’t a good fit, one of these might be the solution. Start your search online, and create a spreadsheet with promising options, so you can track which you've contacted and plan next steps.
Establish your LLC. As mentioned above, filing your LLC can be done no matter your credit score, and it opens up greater opportunities to seek funding and small business support. It can also be done easily online.
Acquire a business phone number. This will legitimize your business and help lenders find you, making you less of a risk. Contact your phone provider to discuss business line options.
Pay on time, every time. Late or missed payments reflect negatively on your credit report, and lenders will be looking for them. Set reminders or set up automatic payments, so you don’t forget a bill.
Negotiate your personal debts. If you’re struggling to make your minimum payments each month, call your creditors and figure out a plan to pay down what you owe. Most will be willing to work with you to pay off credit cards or other loans in a set period of time, and some will be open to lowering interest rates or knocking off late fees. If you have a debt in collections, don’t let it sit. Collectors can also work with you to create a payment plan that works with your budget.
Get your Employer Identification Number. Your federal tax identification number, or EIN, is issued by the IRS. You will likely need it to open a business bank account or apply for a business credit card. Some vendors may also require it before contracting with your business.
Keep tabs on your credit. Credit reporting isn’t a perfect process, and errors do occur. An inaccuracy in your report may be dinging your credit score and preventing you from getting the financial support you need. Keep tabs on your credit by examining your personal credit report on a monthly basis. The major credit bureaus offer numerous monitoring services, some of which are free or low-cost.
Don’t let your imperfect credit score keep you from pursuing your dreams of business ownership. By understanding the links between personal and business credit and following the tips outlined here, you’ll soon be able to bring your vision of owning a small business to life.
Wendi is a freelance writer based in Indianapolis, IN, with over a decade of experience writing for a variety of industries from healthcare to manufacturing to nonprofit. When she isn't working on solutions for her clients, she can be found spending time with her kids and husband, working in the garden or doing more writing (of the fiction variety).