Small business owners are often familiar with the role credit plays in getting their company started, but what about when you’re up, running, and open for business? Both personal and business credit can play a significant role in your short- and long-term business objectives.
Great credit, both personal and business, can help you access capital at low interest rates. You’re also more likely to have positive partnership with vendors and suppliers that can help you access inventory with better payment arrangements.
On the contrary, bad credit can make it impossible to get loans and lines of credit, and if you can secure either of those two items, it’s likely you’ll be looking at a much higher annual percentage rate (APR). Additionally, poor credit can stop you from creating positive relationships with vendors and suppliers and ultimately from taking major steps forward in your business, especially when it comes to SBA loan rejection.
In fact, we recently surveyed 250 small business owners and found that 26% of them actually avoided hiring or expanding because of difficulties or frustrations associated with trying to access funds.
So if you have bad personal and business credit, how can you prevent it from blocking your business?
First and foremost, you’ll need to check both your personal and business credit reports.
As a consumer and a business owner, it’s imperative that you check your credit regularly. Occasionally, errors do happen, and spotting them is the first step to getting them off your report.
You’ll want to check your personal credit reports from the major credit reporting agencies, Experian, Equifax, and TransUnion, and your corresponding credit scores and your FICO credit score. FICO, Experian and Equifax are also big names in business credit. Additionally, you’ll want to look to Dun & Bradstreet, which is one of the major business credit reporting bureaus.
Start to focus on improving your personal credit, and do so as soon as possible.
If you find errors on your credit report, you’ll have to appeal or contest them with the reporting bureaus. If your bad credit score stems from late or default accounts, create an action plan to resolve the delinquent debt and, going forward, ensure you pay on time to help get your credit back on track.
Addressing personal credit issues, especially if you’re just starting your business, is absolutely a must, particularly when you’re hoping to work with lenders who will look into your personal credit. It’s additionally important to prepare to work with lenders like the SBA who consult the FICO® LiquidCredit® Small Business Scoring Service℠. Increasing your personal credit score can help increase your FICO SBSS score and decrease the perceived risk of doing business with your company.
Improving your credit scores, business or personal, does not signify an end to your credit monitoring duties. This is an activity you should regularly partake in. Doing so will help keep you abreast of any downward trends in your score, and you’ll thank yourself if you need to access emergency capital at a low cost.
Separate your personal and business finances.
For the small business owner, it’s especially hard to remove your personal credit from your business credit, but you should make every effort to keep them as separate as possible. Just like poor personal credit can negatively impact your business finances, problems with your business finances can potentially hurt your personal credit. To avoid either of these scenarios and to start making headway in your attempt to improve bad credit, you should check the following off your list:
- If you haven’t done this already, the first step to separating your personal and business finances should be establishing your business as a separate entity, such as an LLC or S-corp, and registering your business with the government and state. This will help limit your personal liability and provide you with an EIN, which is necessary for a variety of activities, including filing taxes and our next step.
- Once you’ve established your business as a separate entity and have an EIN, you’ll be able to open a bank account in your company’s name. This should be the only account you use to manage business-related finances (paying bills, issuing paychecks, etc.). A business account can help alleviate any confusion in spending, and it can eventually lead to a decrease in personal liability for your business accounts.
- If you already have bad business credit, obtaining a loan or line of credit may not be an option in your immediate future. However, you should try to work with suppliers and vendors that report to business credit reporting agencies to obtain a line of credit. By upholding this relationship, you’ll be able to build a positive credit history, which will ultimately work to improve your business credit.
- There are a number of business credit cards for bad credit that you will want to consider. Obtaining a credit card in the name of your business helps keep your business expenses off your personal credit and, if you make on-time payments, can help you build your business credit.
Following these steps can be of monumental help when you’re trying to keep poor personal business credit from stopping you from taking your business to the next level.
