Business Start-up and Your Personal Credit

Starting a business may actually hurt your personal financial position.  If you’re going to borrow money personally for a new vehicle or a home, being self-employed will create a problem if your business is new.  Retail bankers are not business bankers and may not have the skills to evaluate or understand your business.  And, it’s not their job to review your business to determine if you have the capability to repay a loan.  They will want to see two years of profitable operation in the form of financial statements and tax returns.  If you are unable to produce those, you will not be viewed favorably.  In fact, if you have yet to produce two years of profitable operations, your business will likely hurt your chances to get any kind of loan.

  

If you plan to purchase a new home for example, the mortgage company will look at the income and credit of you and your spouse.  Your combined incomes will be used to qualify you for the loan.  If your spouse earns enough income to qualify for both of you, then all the better unless your business has filed tax returns showing a loss.  If so, that loss will be deducted from your spouse’s annual income.

  

Plan major purchases, college education expenses and the like against your plans to start a business.  In some cases, you’ll be better off waiting to start your business until after the major financial expense event.

What does my FICO score have to do with anything?

In a word, EVERYTHING.

  

The personal credit score is the first and most often cited reason that individuals are unable to borrow money to finance their business dreams.  They never get a chance to describe their idea, show their financials or impress with their strategies.  The banker looks at the personal credit score (called a FICO Score) and says, “No thanks.”

  

If you will need to borrow money from a financial institution to finance your start-up, you will need a minimum credit score of 680, and probably much higher.  Make an appointment with a commercial loan officer at your bank and discuss the process.  Find out about the bank’s credit score requirements  and make sure you have a high enough credit score to qualify.  While you’re there you can get a general idea of the bank’s underwriting guidelines and business information requirements and you can find out if they lend to start-ups.  Many banks and credit unions don’t lend money to start-ups at all.  Your company may need a couple of years seasoning before they will consider a financing request.  Of course, you probably won’t need the money by then. 

  

Don’t wait until you need the money to start the process.  Make friends with the banker and learn about the banks requirements.  Start building your personal financial position and improving your FICO score.  If you have bad credit, see a personal credit counselor.  There are many free services to help you understand personal credit and how to manage it better.