A successful small business requires money to sustain it and investment to grow it. Of course, securing investors is difficult so small business owners usually rely on a business loan or line of credit to supplement initial business growth.
This means a bank is going to look at YOU and your Credit to determine if you business is viable. Your credit does not have to be perfect to get a loan or line of credit to start a business but obviously - the better your history the higher your chances are to obtain financing.
According to the Small Business Administration (SBA) - "About half of small businesses fail within the first five years." Even if your type of business is blessed with low start-up costs and low overhead - odds are you will need an option to supplement the business when added funds are required.
Assessing Your Business Risk
New entrepreneurs often make the mistake of thinking that by registering a corporation they can secure credit by only using their new business Tax Id. This is not entirely accurate. A bank will usually determine eligibility by using your personal social security number. Banks will evaluate your personal credit history as a factor for how risky it would be to lend money to your business. Each bank uses their own proprietary risk formula, which is often based on a model devised by Fair Isaac Corporation (NYSE: FICO). The better your credit scores, the higher the chance your small business will have longevity.
Credit History Shows Trends
While a lender may consider your assets and equity, your own personal debt repayment habits can influence the size and type of loan or credit extension your business may receive. It can also affect the percentage rate of interest as well. Higher risk can equal a much higher rate which can cost your business thousands of dollars. For instance a 5% difference (10% compared to 15%) in APR on a $20,000 debt carried for five years can add up to a difference of over $3,000.
Be sure to review your financial history before considering funding for your business. This allows you to check for negative reports, errors or identity theft issues that could jeopardize your chances of getting funding. If you do have negative issues on your credit, you may need to wait until they are older or any disputes are resolved before taking your new small business to the next level.
Lending is Still Personal
If you do have a tarnished credit history - all hope is not lost. Just because you have personally made a mistake in the past does not automatically disqualify your chances. If you have some equity in your new business, this can positively influence the decision of a lender because obviously - you are an investor who wants it to succeed!
Start developing a consistent pattern and take a proactive approach to improve your personal credit score now. This will not only help your future business - but you as well!