When it comes to getting qualified for financing, your credit history is one of the most important factors lenders consider before they decide in approving your loan. Lenders will typically go through your credit report and check your credit score to know how creditworthy you are. But what will matter most, your personal credit or business credit?
Personal Credit is Important to Your Business
In a perfect world, it would be easy to get funding for your startup business because it has not yet made any loan defaults in the past. Your personal credit problems and mistakes that were made years ago would have no bearing on whether the bank would loan you money and you could keep your personal credit out of your business dealings.
But of course, we don’t live in a perfect world. The reality is, it’s becoming more difficult to find the money to bankroll business startups. Banks and other lending institutions know they are in a seller’s market and they can (and will) require you to give them personal credit information that will be used to determine whether your business will be approved for loans and credit lines to fund your startup and working capital needs.
Yet although a good credit score is ideal, that doesn’t mean you need to have perfect credit to get a business loan. You will, however, need to shop around to find a lender who will provide you with a business loan despite having bad credit. The catch is, a bad personal credit may mean higher interest rates with strict payment terms. This is why you need to fix your tarnished personal credit as soon as you can.
Why personal credit matters?
There are three primary ways to get money for business startups:
- banks and other conventional lenders;
- the Small Business Administration; and
- independent investors.
For the first two, personal credit is one of the most important deciding factors.
Banks and Other Conventional Lenders
Without an established business experience and regular stream of revenue, business startups will usually find it difficult to get approved for financing from banks and other conventional lenders. If you have already been a client with good relationship background with the bank, there is a possibility that they will finance your startup.
It would take at least six months of regular deposits for a bank to be interested in financing your business. Additionally, if you have a steady revenue stream and enough cash reserves, your personal credit score may not matter that much anymore.
Small Business Administration (SBA)
To get an SBA loan, you need spotless credit. The process of getting a loan guaranteed through the SBA is difficult – in 2013 only 13 percent of applicants were approved – and you will typically need a minimum FICO score between 640 to 700 to be considered.
Venture capitalists, crowdfunding campaigns, and angel investors are less interested in your personal credit scores than they are in you having a solid business plan and a marketable product or service. Since most independent investors take a more hands-on approach to businesses they are funding, they have access to financial statements and can determine whether their money is being spent wisely or wasted.
Although there are other ways for businesses to get funded, when it comes to starting up your business, you are generally going to need good credit so investors will be interested in funding your startup. It is important for your business plan to include a strategy on how to fix your credit as needed.
Other uses for personal credit in business
Although you might be able to find a way to get your business started without a good credit score, fixing poor credit is essential for your business’s overall financial health. As your business grows, you will need more funds and working capital for expansion, innovation, and improvements; and a business loan is necessary. Poor credit might limit your ability to get what you need to make your business profitable.