Applying for a small business loan is stressful enough without the prospect of bad credit throwing a wrench into things. Without strong personal and business credit scores, you’ll probably get stuck with unfavorable terms — if you get a loan at all. In fact, more than half of small business owners who apply for loans don’t get them, with poor credit scores among the main reasons, according to the Federal Reserve Bank of New York. Aspiring entrepreneurs should build business credit as soon as possible to improve their chances of getting favorable terms when they apply for a business loan, business credit card or a business line of credit .
Before applying for a small business loan or startup business loan, check your personal credit score. It could — and likely will — play a big role in the type of loan you get. Banks and other lenders view your personal credit score as a reflection of your ability to handle money and meet financial obligations. If you have a low score, lenders might think you lack basic money skills and will take that into consideration when you apply for business credit. It doesn’t matter if your business is a success, pays its bills on time or has a perfect payment record when it comes to business credit cards. With a low personal credit score, you’ll likely run into problems getting a small business loan in the first place. Even if you’re approved, you might get less money than you requested and will probably get unfavorable business loan rates.
Those aren’t the only potential problems with a low personal credit score, either – especially if you are still establishing business credit. Entrepreneurs who rely heavily on their personal credit history to operate, and have a low personal credit score, might have a hard time accessing the most basic services. Here are a few examples showing how bad credit can affect your business:
These problems can prevent your business from prospering. The best way to avoid them is clean up your personal credit and start building business credit that will help you achieve a high business credit score.
Personal and business credit scores both seek to determine someone’s creditworthiness and ability to handle money, but that’s about all they have in common. Here are some primary differences between personal and business credit score:
There are several different options when getting a business loan , ranging from bank and U.S. Small Business Administration (SBA) loans to venture capital investments to alternative funding procurement options like Seek Business Capital. Banks tend to be pretty strict when it comes to credit scores. A Forbes article explains that personal credit plays a “critical” part in a bank’s willingness to extend credit: “Banks are not in the risk business and they want to know that you’re borrowing with the intent and ability to pay them back.” If you have a low credit score, banks might require you to put up considerable collateral to get favorable small business loan rates. It’s also difficult to get SBA loans with a poor credit score, for the simple reason that so many small businesses are competing for these loans. A credit score of at least 680 is usually needed to qualify for an SBA loan. Private lenders and VC investors are usually more flexible about business credit scores because they’re more willing to take on risk. The terms on these types of loans will vary from one entity to the next.
Building business credit is important for any entrepreneur. So is keeping business credit separate from personal credit and expenses. Here are a few ways to do that:
If you have a poor credit score, don’t get discouraged. You can improve it by taking certain steps:
No matter what, don’t ignore your credit score. Just because you ignore it doesn’t mean it won’t matter.