how can your personal credit score impact your business
TRANSCRIPT
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.