Do You Need Good Credit to Start A Business?

StrategyDriven Starting Your Business Article |Credit Score|Do You Need Good Credit to Start A Business?We all know that many entrepreneurs have bad credit score. Some businesses only start because the owners are unemployed, laid off, or worse, bankrupt. Some even start their businesses when opportunity arrives and not when their financial situation is good to begin with. Moreover, some go through personal difficulties which affect their personal credit score at the same time.

Do you need good credit to start a business? While having a bad credit should never be a hindrance for you to start your own business. There are some things that you can do to at least improve it. Improving your credit score allows you to get loans or business line of credit that you can use to build your business.

If you’re planning to startup a business but realized you have a poor credit history, you can check out these tips on how to improve your credit:

1. Don’t use big banks as a funding source.

Back then, banks only depend on your credit history, collateral, cash flow, and character when it comes to bank loan approval. These days, most banks tend to focus on credit history, particularly when making decisions on loan approval for small business owners. This happens because banks are now driven by the banking consolidation, which force them to automate the credit decision process and lessen the labor that takes place in credit evaluation. Regardless of how great your business proposal is, having a below 650 credit score will not get you anywhere a bank loan is involved. A good credit score is important if you want to get a loan.

On the other hand, you may apply for home equity loans in order to secure that much-needed funding. However, it is not advisable, particularly during the earlier cycles of business as cash flow can be a little unstable.

2. Determine the difference between your personal and business credit scores.

You may know by now that banks, especially the large ones, focus on the personal credit scores. Smaller lenders or banks, on the other hand, combine your personal credit score and business credit score, together with a lot of other factors when it comes to loan approval.

Keep in mind that your personal credit score is affected by a lot of factors. These include outstanding debts on personal credit cards, history of bill payments, late payment history, as well as the number of credit lines opened. While your personal credit score is associated to your Social Security number, business credit score is linked to the business tax ID. These differences can help you and your business get the financial boost you need.

A damaged personal credit score can affect how banks or lenders see your loan application. Hence, you need to consider obtaining a separate business tax ID number to link with your account. This is possible but you need to be very careful when doing this.

Apart from getting a separate tax ID number, making sure that your business has a distinct identity is crucial. Here are some tips:

  • Get an official business name and register it with the local authorities.
  • Get a separate business address that is not a P.O. box and have a separate telephone number listed under your business name.
  • Open a bank account under your business name.

These administrative tasks may look minor and unimportant, but they play a crucial role in distinguishing your personal accounts from your business.

3. Slowly build the credit score of your business.

Now that you have a business tax ID number and a legal business name, you can now start building the credit score of your business. Doing this helps your business establish a way to qualify for a business line of credit from suppliers and other sources of capital.

Starting a Business is Not Always About Good Credit

Keep in mind that anybody can start a business, regardless of how good or bad their credit scores are. If you need some funding and cannot go to banks and big lending facilities, you can opt for other ways to fund your business. You can ask family and friends to lend you personal loans. Just make sure to thoroughly talk it over and discuss with them the payment terms or the risks that they are about to take. Also, you can use credit card loans to help you with your startup. Although it is not the best way to do it, it is a much better option than not starting at all because of lack of funds.

Remember that nothing should stop you from building yourself to success. You may have a bad credit score now, but slowly, with the help from the right institutions or the right persons, you will be able to start the business and eventually make that business grow.