Nothing is more frustrating than knowing you’ve got a million dollar idea and not one dollar to put into it. But this is a common situation in today’s world. Many people barely have enough money to pay their monthly bills, much less finance a brand new company.
This can be extra challenging if you happen to be young. During your college years, credit card companies probably delivered offers to your mailbox left and right, which you probably ignored and threw in the trash. What you didn’t realize, however, is that was your best chance to establish your credit history. If you missed the boat on that opportunity, and you haven’t established good credit by the time you reach your mid-twenties, it can be extremely difficult to get a bank to consider approving you for a credit card.
This catch-22 also means you cannot qualify for a business loan. You do not have good credit because you haven’t had a chance to build it. But you cannot build it because you do not already have it.
The good news is, you may not be as stuck as you feel—even if you are trying to start up a cash-intensive business which requires extra liquidity. Let’s take a closer look at how business and personal credit work, and what you can do right now to start building credit even with no history.
Should You Use Personal Credit or Business Credit To Finance Your Startup?
When you go to apply for a loan from the SBA or another lender, they are going to look at one (or both) of two things: your personal credit or your business credit. They are generally only going to look at your business credit if you already have established some by doing business in the past. Otherwise, they will usually turn to your personal credit score.
Some lenders may look at both personal and business credit scores to formulate a more comprehensive risk profile. So even after you start to develop good business credit, it is important to keep your personal credit score as high as you can.
There are pros and cons to using personal credit to finance a business. On one hand, you can use it to fuel your startup and and start making money. One of the downsides, however, is that your personal credit score could take a hit if your business encounters trouble.
The steps for building business or personal credit:
Regardless of the route you choose, the good news is that the steps for building either type of credit are more or less the same.
- Step one is a little obvious but you’ll need to open a credit card or line of credit. Preferably one with a lower limit that you can easily cover each month.
- Be on time. You need to make timely payments on business or personal loans and utilities (a good first step for establishing personal credit is to pay off your student loans).
- Don’t just pay the minimum. You should avoid carrying a balance on your personal or business credit card, and you should try keep credit accounts open.
- If you’re opening multiple cards, do it within the same time period. Timing counts too when you are applying for personal or business credit to finance a startup. Whenever a lender checks your credit score, it drops by a few points temporarily. That means if you space out your applications, you will routinely lower your credit score. But any applications you place within a two-week period count as just one application, and only dent your credit score once.
This infographic from InvestmentZen covers five easy steps to build credit now and discover more about the benefits of a high credit score:
What should you do if you are denied a business or personal loan because of credit?
Your next step should be to contact the three major credit bureaus (Experian, Transunion and Equifax) to request a report. You are entitled to one free annual report per year for personal credit.
If you are denied a loan because of your business credit, you can request a complimentary report inside of 60 days by providing a written adverse action letter from the lender. Once you see what is on the report, you will have some idea for how to proceed when it comes to building (or rebuilding) your credit.
What will you use this business capital to achieve?
Now that you have a glimpse into what it takes to use credit to finance a small business, let’s back up a bit:
What are your business goals?
Do you know—from a financial perspective—what it takes to get from where you are today to the vision you have for your business? In this guide to goal-oriented accounting, you’ll learn how to use your existing financials to tap into hidden growth potential. Get your copy here: