Most female entrepreneurs have heard the advice to keep their business and her personal finances separate. There’s a good reason for it too. Dipping into her personal credit to help fund her business ventures is not only asking for trouble, it’s also unsustainable.
Did you know businesses tend to borrow at ten times the rate of a private household?
As your business grows its financial need will likely exceed the lines of credit available to you as an individual. If there’s not a lot of cash on hand, your business may need a healthy line of credit readily available for expansion costs and unexpected expenses. If you don’t have good credit history there are ways to get personal loans with bad credit, but they usually come with high-interest rates and misc fees.
In order to borrow the amounts that facilitate business establishment or growth, you’ll need a stellar business reputation both in performance and in creditworthiness. If you’re just starting out, lenders may use your personal credit score in lieu of this.
While some of us may have large personal credit lines to lean on when business needs arise, the truth is, your personal finances and your business finances should not co-mingle. But it’s often impossible to keep them completely separate… especially when you’re in the beginning stages of building your business. Even more so with the fact that most business credit is based on your personal credit history (a catch 22, right?).
So, if your personal and business credit rating are intertwined, what do you need to know in order to prevent your personal finances from impeding your business goals?
Personal and business credit ratings: Know the difference
Personal credit scores are determined by a fairly standardized system using the FICO (Fair Isaac Corp)’s algorithm. They range from 300 to 850 and are made up of the following 5 factors
- Type of credit (10%)
- New credit (10%)
- Length of credit history (15%)
- Amount owed (30%)
- Repayment history (35%)
Business credit ratings, however, are calculated differently. They are determined by far less standardized factors which can vary from bureau to bureau. A business credit check will usually consist of a credit score as well as a business credit summary which will include corporate registration, CEO’s contact information as well as summaries of collections and payments, bankruptcy filings, county court judgments or tax lien filings.
What happens if your personal credit score is bad?
In the post-crisis economy, lenders (especially banks) are more cautious than ever. Even if you can demonstrate success in your business endeavors, a poor personal credit rating may give them pause. Your loan application may be denied, you may have a higher interest rate or additional fees, or the amount you are offered may fall significantly short of what you applied for.
What can you do?
If you’ve been denied business credit, it’s important to note that a rejection from one lender does not necessarily mean a rejection from all. Different lenders use different scoring criteria. Do your research. Identify lenders that specialize in helping entrepreneurs with your credit standing or that are familiar with your industry. You may also want to look into borrowing from more non-traditional lenders such as web-based and microlenders.
Tip: Start building business credit as quickly as possible with a secured credit card. Well’s Fargo has a secured credit card for businesses.
If you invest time in research you may find that there are several options available to you. There’s a good chance you’ll secure some funding – even if there are concerns about your personal credit score. It’s important that you weigh the costs of borrowing before making a decision to accept an offer of credit. You don’t want to do anything that would damage your business’ future financial standing or creditworthiness.