When you start a business and need financing, you cannot ask for a loan from a bank in good faith. Before your business establishes its financial history, lenders will look at your credit report to approve or deny your business loan. If your credit is strong, you will be able to access larger loan amounts and better terms. If you have poor or bad credit, you may have a hard time getting the financing you need.
Here’s what you need to know about how your personal credit shapes your ability to get a business loan and what you can do if your credit needs a boost.
The Fair Credit Reporting Act (FCRA) is on your side
First and foremost, start by clearing up your personal credit before trying to get a business loan. Get your free credit report from Experian, Equifax and TransUnion to find out where you stand. Most importantly, look for errors, outdated accounts, and false negative flags in your report. These mistakes can completely ruin your ability to get financing for your business. The good news is that you don’t get stuck with these mistakes. You have rights under the FCRA Disputing inaccuracies and forcing credit bureaus to investigate.
If you discover an error, file a formal dispute with the credit bureaus to have it removed. This is the only way to remove incorrect late payments, balances, and accounts from your credit report. When a dispute occurs, the FCRA gives the credit bureaus 30 days to investigate. If they cannot verify the information, they must remove it. This can work in your favor because even an increase of 50-100 points can be to your advantage. credit score could cause interest rates to drop significantly. The important thing is to get your score above 620, and if you can get to 760 you’ll get even lower rates. If you encounter any problems, contact a consumer protection attorney to pursue your right to correction.
Lenders Use Your Personal Credit to Assess Business Risk
When your business is brand new, lenders don’t have a financial history to review. The only way lenders can make financial decisions is by looking at the business owner’s credit report. That’s why startups are evaluated based on the owner’s personal credit history. Naturally, high credit scores increase the chances of loan approval. Low scores won’t necessarily prevent a business from being approved, but requirements will be stricter and interest rates will be higher.
Better Credit Unlocks Lower Interest Rates
It’s nice to get approved for a loan, but high interest rates can cost you a ton of money. Your credit profile often determines your interest rate. The better your profile, the lower your interest rate. Over time, even a small difference can cost thousands of dollars. For many businesses, high interest rates make it difficult to grow and create cash flow problems.
Sometimes Sellers Check Personal Credit
Having strong personal credit can help you grow your business faster. Banks aren’t the only ones who care about your credit. If you are working with a supplier who is trying to get extended payment terms, they may also check your credit. For example, sellers are more likely to approve “Net-30” or “Net-60” terms For business owners with good credit. If your business is new and you don’t have an established credit profile, sellers will want you to have good personal credit.
Personal credit affects your ability to rent space and equipment
If your business must operate out of a physical space or use expensive equipment, your personal loan will be used to negotiate these terms. For example, potential commercial landlords will review your personal credit before approving your tenancy. Equipment lenders will also evaluate risk based on your personal credit. If you have good credit, your down payments will be lower and you will get better terms. Weak credit will likely require higher deposits and tighter lease terms, which could limit access to capital and slow growth.
Small Business Loans Often Come with Personal Responsibility
Many small business lenders requires personal guarantees. This means that even if your business has established credit, your personal loan is directly tied to your business’s repayment. In such cases, if your business defaults, your personal credit will be affected. Having strong personal credit from the start gives you a better chance of securing favorable terms in this situation.
Build Your Credit First, Then Build Your Business
Even if you have the best idea and a clear plan, poor personal credit can make it difficult to start your business. To avoid unnecessary hurdles, fix your personal credit first, then start building your business.
Photo: Sasun Bughdaryan: Unsplash
