Need a Business Loan? Clean Up Your Personal Credit
After a recession in which credit scores took big hits and personal assets lost value, many small-business owners don't think they have the business credit they need in order to get financing.
The truth is, though, that many lenders don't heavily rely on business credit scores in order to determine if a small-business owner is a candidate for a loan.
Do you have a business credit history?
Business credit files are established by vendors and lenders reporting on a business' payment behaviors. Business owners establish good credit by responsibly managing their vendor invoices and keeping business loans payments up to date. Simply put, if you pay your invoices and debts within terms, you have good credit.
Businesses in some industries, such as construction and manufacturing, tend to use many vendors who report to business credit bureaus such as Dun & Bradstreet. This activity helps businesses in these industries to establish a thick credit file.
However, entrepreneurs in other industries, such as day care or consulting, use relatively few vendors. Companies in these sectors are more likely to have a less robust credit history because of the nature of their business.
If an entrepreneur relied on personal assets or personal debt to get her business started, her company would also have a thin credit history.
Does it matter?
Not as much as you think. If you have a weak business credit file (or none at all), there's no need to build business credit before applying for a loan. Though there are companies that will attempt to create a creditworthy profile for you, trying to build a credit history overnight is a nearly impossible task with minimal reward.
And in a post-recession world, it's not necessary. Lenders today look at much more than business credit. Instead, invest in your business in more meaningful ways, and keep an eye on your personal credit. More and more lenders ask for personal guarantees on loans, especially when a business has no borrowing history, so personal credit often becomes more important than business credit for small business owners in the long run.
So keep your personal credit report clean, and apply for that loan.
AMI KASSAR | Columnist | CEO, MultiFunding.com
Ami Kassar is founder and chief executive of MultiFunding, which helps small-business owners find the best business-loan options. Kassar speaks regularly at universities and small-business events about entrepreneurship and access to capital. He has an M.B.A. from the University of Southern California and a B.A. in American studies from Brandeis University. He lives in the Philadelphia suburbs with his wife and two children.