Starting a Business: Good Personal Credit is a Necessity

By: Tom Ambrozewicz

If you are thinking about starting your own business, banks will look at your personal credit history if you have no business credit history. Thus, credit scores are more important than ever. While banks previously determined whether to lend to a business or not by looking at your credit, the business's potential, any collateral you may offer, and your personal career history, this process has become extremely condensed in order to process more applications and level out the bank's risk, so without excellent credit, you might find yourself denied a business loan.

Start by getting a tax identification number for your business, which helps separate your business credit history and your personal credit history – an important step in building your business credit and helping to launch your business. If you have bad credit, separating your business from your personal credit is crucial. You can do this by applying for a tax identification number for your business, but also by securing a business office address and phone, as well as a business bank account.

Larger and better-known financial institutions often automate their credit application processes now, and having a less than average personal credit score and no business credit history will hurt your chances of obtaining a loan. Try smaller, hometown banks, which are more likely to view you personal credit score while factoring in the potential of the business. Some lenders focus on high-risk loans for entrepreneurs. These loans often start with high interest rates, with the understanding that increased business cash flow can lower the rate. Depending on the amount of your start-up costs, you can also consider opening up a business credit line to help with initial expenses.

Another option in obtaining money is opening up a home equity loan. This may be a risky option, depending on the viability of your business. Home equity loans are loans taken out against your home. These loans can give you the start-up cash necessary to fund your business at relatively low interest rates, but depending on the strength of your business, you could lose your house if your business fails.

Once you have a tax identification number for your business, you can begin building your business's credit history and score. You can do this by paying any business bills on time, especially your business credit cards. The national credit reporting agencies have also developed a credit report for businesses, and this will allow you to better track your business's credit. By maintaining good personal credit, you can start off with good credit in the business world as well.

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