Are you thinking of starting a business? One thing you should know is your credit score could impact whether your entrepreneurship dreams become a reality. LegalZoom recently conducted a survey on loans, credit, and what entrepreneurs should know about the link between credit scores and getting a business up and running.
The Cheat Sheet spoke with Paul Kassabian, legal product counsel at LegalZoom, to learn more about how your personal credit score could affect your ability to start a business.
The Cheat Sheet: Which survey results surprised you most?
Paul Kassabian: What was most surprising about these survey findings was people’s general lack of awareness around their personal credits scores, especially around what could negatively impact it. Only about half of Americans believe factors like opening a credit card, taking out a loan, or having debt would impact their credit score, leaving another half uninformed or misinformed about what can and cannot affect their credit. Even more troubling, as many as 1 in 10 Americans thought none of these would in any way impact their credit score.
CS: How does a personal credit score affect your ability to get a business loan?
PK: Most people don’t think about their credit score until they make a big purchase, like a car or a house, but a good personal credit score is essential when it comes to obtaining a business loan. Most new entrepreneurs need a loan to get started, and good credit is essential to qualify.
Only around half of Americans (46%) think their personal credit impacts their ability to take out a business loan. It does, so it’s important to keep the factors that can impact a credit score (opening a credit card, paying off debt, having debt) in mind. When people carry a lot of debt, they tend to have a low credit score–making them more likely to run into issues when applying for a business loan.
CS: What are some other ways your personal credit score could affect your ability to start a business?
PK: On top of making it difficult or even impossible to receive a business loan, having a poor personal credit score can make it challenging to open a business bank account. Most banks will check an individual’s credit score before allowing them to open an account. A poor credit score can get in the way of qualifying for certain credit-based bank services like overdraft protection, an overdraft line of credit, or a business credit card.
CS: What personal credit score range are lenders looking for before they would approve a business loan?
PK: Personal credit scores typically range between 300 and 850 points. For most small business loans, lenders typically require a credit score of at least 620. However, the credit score requirement can vary based on the type of loan. For example, to get a Small Business Association (SBA) loan, generally, a score of 640 or more is needed, whereas to receive a short-term loan from an alternative lender, a score of 550 or more may be sufficient.
CS: What is a business credit score and how do you establish one?
PK: A business credit score, similar to a personal one, tells lenders how likely someone is to repay them in a timely fashion. Having a good business credit score can help business owners secure better terms when applying for a small-business loan or keep insurance policy costs low.
To establish a business credit score, there are a number of steps small business owners can take. Regardless of the type of legal entity (corporation, LLC) businesses may form, it is imperative to keep personal and business finances separate, and the first way to do that is through a business bank account used solely for business finances. Business owners also need to obtain a federal tax identification number (EIN), essentially a Social Security Number for businesses, to open a business bank account in the name of the company.
To begin building a good business credit score, it is helpful to not only open a business bank account but also a get a business credit card, and, if possible, establish a line of credit with vendors or suppliers. Finally, it’s imperative to pay bills on time—late payments can negatively impact a business credit score.
CS: Is there a credit reporting agency for businesses? What is the name of the top agencies?
PK: There are a number of credit reporting agencies that businesses can choose—the primary agency, which has over 70 million businesses registered, is Dun and Bradstreet (D&B). However, there are other agencies that businesses can choose from, including Equifax, Experian, FDInsight, or Credit.net.
CS: Anything to add?
PK: Before starting a business, it is important for aspiring business owners to consider their personal finances. Failing to do so can seriously impact their ability to get their business up and running smoothly. It’s also best practice for business owners to keep their personal and business finances separate. This can protect a business owner’s personal financial liability should something go wrong with the business.
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