If you’re setting up a new business, despite the ever popular alternative sources of startup funding including crowdfunding sites such as kickstarter the most instinctive thing to do is march on down to your bank manager, with a business plan in hand, to apply for a small business loan. Something to consider, before heading on down to the bank however, is how your personal credit score will affect your business loan application.
The challenge is that no matter what your idea, indeed, you can have the best business idea in the world, but if you have a poor credit score, particularly if the loan is not secured on a personal asset such as real estate the bank will see you as a credit risk and deny the application. This can feel very frustrating, as many exceptionally successful entrepreneurs have faced financial problems in the past, including bankruptcy, due to the natural risk associated with being an entrepreneur – however, the bank doesn’t like risk, they tend to prefer to give money to people that don’t really need it; and where there is substantial security in place to guarantee they will recover the amount borrowed should you default.
This can be even more the case with a business that has limited liability, meaning, you could dissolve the company through insolvency procedures and not be personally liable for the debt – banks like to make sure you have some skin in the game, and are financially responsible in your personal affairs, before lending to you on a commercial basis. This is why having a strong credit score is vitally important when making a business loan application.
If you have reason to believe you might have a poor credit score, you might want to check out repair.credit, as services like this can help improve your score. A low credit score could be because you have accumulated debt in the past, have missed several payments on credit agreements, or simply because you don’t have much of a credit record because you’re either young, new to the country, or haven’t previously had credit in your own name. There is nothing intrinsically wrong with having a low credit score, it’s just that if you’re applying for a business loan, it can be a massive hurdle that could stand in the way. It would certainly help your application if you have a property, but in today’s economy it can be very difficult to get a mortgage for first time buyers, which can leave entrepreneurs, particularly young entrepreneurs, in a frustrating catch-twenty-two position.
One solution, if you have poor credit is to consider having a trusted friend with a good credit score come on board as a director. This way, when the bank does an initial credit check for the business, it will reference each of the directors, meaning a cumulative score will be created – if you’re score is 60/100 but you have two directors with a score of 90/100 then the average will be much more amenable from a bank’s perspective.
In summary, try not to be naive with regard to how your personal credit score will affect your business loan application – but don’t give up – work on improving your individual credit score, and consider the possibility of balancing it out with other trusted applicants.