How to Manage Your Business and Personal Credit Ratings

money credit card public domainThe boom in fundraising platforms such as Kickstarter and all the sites that connect startups with venture capitalists is giving entrepreneurs far more options than they had just a few years ago.

However, borrowing money is still the way most small businesses get off the ground and about half the money borrowed is obtained in the business owner’s name. And to take it one step further, many times the loans come via the owner’s personal credit card.

This illustrates two facts that small business owners need to understand:

  • Your business credit worthiness will be in part determined by your personal FICO score, and
  • Your personal credit worthiness can be ruined by a failed or struggling business venture.

With this understanding, small business owners can better manage their position for borrowing. A good first step is to know your FICO score. Five elements are considered when assigning a FICO number. Here’s what they are and how much they contribute to the final score:

  • Payment history, 35 percent,
  • Total debt, 30 percent,
  • Length of credit history, 15 percent,
  • New credit accounts, 10 percent, and
  • Types of credit, 10 percent.

Obviously, having a long history of making payments on time and having a fairly low debt to income ratio are the most important elements. If you’re a Millennial without any credit history and think that someday soon you’ll want to start a venture, it may be a smart idea to establish credit that you can easily handle, so you’ll have a solid history in place for the day when you’ll need it.

Separating business and personal credit

If you want to separate your personal credit from your business credit, you need to incorporate so banks and other lenders can see your business as a separate entity. When you do this, your corporation gets its own Federal Tax Identification number. It then begins to create its own credit files which are separate of its ownership.

Once you do that, setting up revolving accounts with local suppliers can be an easy way to start compiling a good credit history for your company. You need to know that it will take a strong credit history for your company before you’ll be able to “untie” your personal credit from your business.

If your major suppliers or potential lenders think there is much risk in extending credit to your company, they will ask for your personal guarantee in one form or another.

Finally, I’ve seen that bigger banks are starting to look more favorably on lending to small businesses in recent months. However, in the long term, it’s still smarter to establish a relationship with a good local or regional bank. They are the “go-to” lenders who understand your business and your market, and they are far more dependable in both good times and bad.


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