Small Business Loans | Unsecured Credit

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How Vital Is An Excellent Credit Rating For Your Business?

You may not be alone in that millions of entrepreneurs and business start ups are in dire need for investment capital, while on the other hand face an even greater challenge for means and ways to procure those very funds.

Obtaining business credit and financial resources can not only be your first hurdle, it can be a place where many stumble and fall.

Most entrepreneurs find themselves in a very precarious situation: They do not have good credit personally. Some start a business because they want to strike out on their own and don't have many options for their future. Many others start a business when opportunity strikes, rather than when their personal financial situation is in a favorable condition. A few others, and growing by the day, have gone through divorces and personal bankruptcies which have devastated their financial strength and credit score.

If you are starting a business and have a sub-standard (or nonexistent) credit history, here are a few rules that one should be well apprised of:

1. You may have to forget big banks as sources of funding.

Traditionally, obtaining financing from lending institutions was based on the four Cs of credit:

Credit score (Personal and business)
Cash flow
Collateral
Credibility of Character.

Today, this is not as true for most large, well-established financial institutions. They care little about three of the four Cs. Now they focus purely on just one in making lending decisions to small-business applicants: credit history. This is because consolidation in the banking industry has driven banks to automate their credit decision processes and minimize the labor involved in getting to know credit applicants face to face. Particularly in the last decade, as technology has evolved, it is all about the number and less about your character or the validity of your ideas.

If you have a great business idea but poor credit history (such as a credit score below 650), your chances of procuring financial backing from banks is highly unlikely. Even if you have a brilliant business concept and plan, a strong character and long-term work experience, it is highly unlikely that you will procure any money from big banks if your credit score is not above 640 minimally.

There is one notable exception to this rule: home equity loans. If you are willing to secure your business loan against your personal equity in your home, you will have plenty of options even with poor personal credit. But be very alert about depending on home equity loans too early in the life cycle of your business. This is a high risk option as a failing business can put your home at risk, so this is a practice that is not recommended and even frowned upon by conservative standards.

2. Separate your personal credit from your business credit.

While large banks focus on your personal credit score, smaller community lenders and business-friendly banks will depend on a combination of your personal credit score, business credit score.

Your personal credit score is established by a few key factors:

Outstanding debt balance on personal credit cards
The number of open lines of credit accounts
Bill payment history
Late payment history.

Your business credit score is determined by similar factors with the main exception that this is linked to the tax ID of your business, not your personal Social Security number. This is the fundamental difference that can help you get your business off and running.

Let us say that you face the situation wherein your personal credit score is damaged. You need to seriously consider getting a separate tax ID number for your business right away, whether you are incorporated or not. If you do not want to spend the money to incorporate your business, you can still get a tax ID number from the IRS even if your business is a sole proprietorship, an LLC or a partnership. You most definitely need to talk to a professional and competent CPA for information on how to do this. It's very simple to complete the relevant form (form SS-4) and send it to the IRS. You can even apply online at the IRS site at www.irs.gov.

In addition to getting a tax ID number for your business, it is vital that you ensure that your business is distinct from your personal identity. You should consider getting a separate business address (not a post office box), a separate bank account, an official corporate name registered with local authorities and a separate telephone listing. While these administrative details might seem laborious and unimportant, they are crucial in distinguishing you from your business.