What if my personal credit is poor?

20Apr07

Why should you be concerned about your personal credit if you are going to build a strong business credit score?  

 Let me be very clear in correcting a myth that is floating around the small business circuit.  Business credit is not a substitute for personal credit.   While a poor personal credit score will not stop youfrom establishing a business credit score, it will hinder you from being approved for larger lines of credit.  

Even when lenders agree to consider granting larger lines of credit based on the business credit score, often, the personal credit score of the company’s owners will be researched to determine the character of the borrowers.   

If your personal credit suggests that you don’t honor your financial commitments and obligations, a lender can very well conclude that you will not honor your business commitments and thus deny your application. 

 

In an earlier post you learned that lenders grant business credit to properly structured businesses not people.  Ironically, it is people who are responsible for ensuring that the borrowed funds are paid in a timely manner.  The same lenders who will not approve your loan application if your business entity is not properly structured, will be the same lender that will require  assurances that the owners of the company conduct financial affairs with integrity.  

Again,  it is possible to build a high business credit score with poor personal credit.   So why is having bad personal credit a problem?  The answer is that even when you establish a strong business credit score, your personal credit score may be a factor under the following circumstances. 

1)   A vendor purchases a comprehensive report on your company  Dunn & Brad Street and it includes a  profile of the company’s principals including their personal credit score;

 

2)      Often the managing members of a new limited liability company or the officers of a new corporation may still be asked by certain banks or lenders to be guarantors of business loans if there is not sufficient collateral for the loan;

 

3)      Even when a business loan is granted based on business credit, having a good personal credit score demonstrates responsible fiscal management and adds credibility to loan applications.  

4)      Demonstrating both a business and personal history of sound financial practices, positions you to receive the best interest rates and lower loan fees. 

5)   It is  not likely that you will obtain large loans without having to at least use your good personal credit as a point of reference for your character when applying for large loans.

 

If your credit report has blemishes or your score is below 650, there steps that you can take to quickly get on the right track.   Start by utilizing the 4-6 month time frame while you are building your business credit score to resolve personal credit issues. 

The company My Fico offers great tools to help you quickly increase your score. 

 

Every principal with 10% or greater interest in the company should order their personal tri-merge credit report with credit scores from  Fico Scores/Reports.    Here you’ll receive all three credit reports, all three of your FICO credit scores and 12 of your negative reason codes which can be used to begin immediately increasing your score.The goal should be to maintain a personal credit score of at least 670 or better.  

 

Remember, you can build a business credit score despite having bad personal credit, but it is always in your best interest to have a high  business and personal credit score.

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