GUIDE: LOANS, GRANTS AND EQUITY FUNDING > PART FOUR

Credit and Credit Repair

So you want to start a business in Kansas City. It’s all fun and games until you need to buy inventory or equipment, fund an expansion or hire new employees. Then, your business will need capital. And your ability to get those funds often depends on your credit. Here’s what you need to know.

Credit basics

What is credit?

Credit reflects the financial history of a person or business. Remember in school the threat of having something go on your “permanent record”? Well, your personal credit is kind of that permanent record. If you have a history of paying your bills on time, repaying loans and not racking up credit card debt, you probably have good credit. But if you have many debts, lots of open accounts and/or haven’t been super-responsible paying loans and bills, your credit is probably not so hot.

A personal credit score is a number between 300-850. It’s a model based on the FICO scoring system. Money Smart Kansas City has a useful guide to understanding credit scores.

Why does credit matter?

Credit tells organizations how big of a risk they would take by loaning you money. If you have great credit, you might get a lower interest rate on things like a car loan or a mortgage. But if your credit is poor, you might have trouble securing a loan altogether.

How do I find out what my credit is?

There are three credit bureaus that track individuals’ credit: Equifax, Experian and TransUnion. You can get a free copy of your credit report from each bureau every 12 months. The federal government authorizes www.annualcreditreport.com to provide these reports at no charge. You can also call 1-877-322-8228 to request your reports. You might also be able to get your credit score – but not the full report – from your bank.

What is business credit?

Like personal credit, a business credit score reflects your organization’s financial history. Dun & Bradstreet, Equifax Business and Experian Business all monitor and report business credit. They use a set of key ratings to determine business credit. These include paying bills on time and financial stress in the next 12 months.

How credit can impact your business

How much money do I need to start a business?

It depends on your business. A microbusiness may only need a few hundred dollars to get started. But high-tech startups can require $100,000 or more. That’s a big spread. To know how much your business will need, do your homework. The U.S. Small Business Administration (SBA) has a helpful worksheet to help you calculate startup costs.

How do Kansas City entrepreneurs find capital to grow their businesses?

Entrepreneurs and business owners mostly bootstrap and self-finance their enterprises. Nearly 60% of businesses are funded by an entrepreneur’s personal savings. According to the SBA, angel investments and venture capital are the source of less than 2% of startup capital.

Other sources of business capital are:

Notice there’s no mention here of “free government grants.”

Why do I need good business credit?

Good business credit is the key that can open many doors for your company. It gives your organization credibility with suppliers and vendors because it shows you’re accountable and able to take care of your financial responsibilities. Good credit helps your business get financing at favorable rates, and it increases the value of your venture. Good business credit also helps protect your personal credit.

Why should business owners care about personal credit?

As you build a business, your personal credit is the business’s credit.

Even if your business is going to be a totally separate entity, you must have your personal credit and finances in order when you start a business.

Why? When you apply for a loan, one of the five things lenders look at is your credit score. When you apply for your first business loan, the lender needs to know if your business (that‘s you) will pay its bills. Since you’ll be signing the checks, the lender uses your personal credit history to make that decision. The thinking is that if you can’t manage your personal finances, you’re probably not going to be a whiz at responsible money management for your business.

In fact, lenders may require a personal guarantee of repayment from the owner, not the business. A personal guarantee ensures that you are personally liable for the debt. Because it’s the owner’s guarantee that’s required, it’s that individual’s personal credit score that matters.

If your company has more than one owner, anyone who owns more than 20% of the business will have to provide a personal guarantee as well. So if you have a business partner who is reckless with their personal finances, he or she may be a liability when it comes to getting a loan.

Can I start a business with bad credit?

Yes, but it’s probably a better idea to repair your personal credit before starting a business. Making your credit a priority will do more than get your business started. Keep in mind:

A strong credit report will give you access to capital for your business at a lower rate. This will provide you with more money to run your business and the potential for higher profits.
Investors, partners and suppliers will review your credit. A poor credit report can limit access to work contracts that you need.
Your personal credit is important throughout the life of your business. This is especially true if you reach a point of growth and will be looking for capital to expand.

Want a better idea of what you should and shouldn’t be doing with your credit? See Money Smart Kansas City’s Credit Dos and Don’ts.

Can I walk away from business debt?

No. If you don’t pay your debts, your personal credit score will drop because you signed a personal guarantee. So not only will you have trouble getting a business loan, but you’ll have trouble getting personal credit for things like a car loan or even financing appliances. And your collateral could be in danger of foreclosure.

How to build business credit for small business

How can I build business credit?

When you’re starting a business, it’s tempting to hurry up and get things started. But taking the time to establish your venture properly will set you up for success.

According to business expert Nellie Akalp, there are six initial steps to establish business credit:

1. Set up a business entity.

2. Get a federal employee identification number (EIN).

3. Establish a business bank account.

4. Get listed with business credit bureaus.

5. Establish business credit history.

6. Maintain a good personal credit rating.

Once your credit is established, there are things you can do to make the most of it. To maximize your credit score:

Maintain three active lines of credit.
Pay everything on time.
Use less than 30% of your credit at any time.
Keep an account open for multiple years to show a longer credit history.
Settle or pay off any past-due debts.
Reduce overall debt by paying more than the minimum due.

You can keep an eye on your credit by ordering a business credit report. And don’t forget about your personal credit score. The two scores are usually tied together somehow.

Do I need good personal credit to get a small business loan?

If your personal credit is poor and your business is just establishing itself, finding a business loan will be challenging. One of the five things banks look for when you apply for a small business loan is character. Basically, can the bank trust you to repair the loan? If your personal credit is a mess, banks will be less likely to want to take a risk in loaning capital to your new venture.

But all is not lost. In addition to taking steps to repair your personal credit, it’s also beneficial to talk to your banker. Be honest about why your credit score is low. This shows you’re forthright and indicates that there aren’t any other surprises around the corner.

How will a small business loan impact my business credit?

It depends. If you take out a loan and make payments on time and in full, a business loan can help your business credit. It will show that you’re a good risk for lenders.

On the other hand, if you make only partial payments or don’t make payments on time, a business loan will hurt your business credit. It will indicate that you aren’t financially responsible. This will be a signal to other lenders that you’re a high risk – and that can impact your ability to get funding in the future.

How do personal business loans impact my personal credit?

If you personally guarantee a business loan, that means you, as an individual, are responsible for repaying the loan. This can be the case for everything from a loan to start your company, to a business credit card.

Any time you guarantee a loan personally, your personal credit will be impacted. In the future, potential lenders might think you already have too much credit. They might also be worried that you or your business aren’t financially responsible.

Are there startup business loans for people with bad credit?

Every lender has its own list of loan qualifications. It’s possible to get startup business loans with bad credit. However, some lenders will exploit entrepreneurs who have low credit scores by charging high interest. Be sure to work with a lender that has a good reputation. U.S. News and World Report compiled a list of lenders who work with business owners with poor credit.

Can I build business credit without using my personal credit?

An unsecured loan may not be so dependent upon your personal credit. But applying can be an arduous process. According to the SBA, there are two options:

Unsecured business loan: An unsecured loan isn’t backed by collateral. However, some lenders require a personal guarantee. Conversely, some lenders offer revenue-based loans that don’t require a personal guarantee. These loans depend on the business’s credit, and repayment time frames are generally much shorter than traditional loans.

Unsecured business line of credit: This can be a good option if your business needs access to cash. To qualify, both you and your business need favorable credit histories and low credit utilization ratios. You might be able to use collateral, like real estate or equipment, to lower your rate.

Both options have intense application and approval processes. Do your homework before signing on the dotted line.

How to repair credit

How can I repair my credit?

First, don’t freak out. If your credit isn’t the greatest, you aren’t alone. According to Prosperity Now, only 57% of Kansans and about 52% of Missourians have prime credit. But no matter what your credit score is, you should know what it is and take appropriate steps to fix or maintain it.

Consumer Affairs provides nine simple steps to fix your credit:

1. Check your credit report for errors.

2. Remove negative marks.

3. Work with a nonprofit credit repair service.

4. Deal with past-due bills.

5. Always – always – pay bills on time.

6. Pay down your balances.

7. Increase your limits.

8. Don’t close old accounts.

9. Become an authorized user.

How long will it take to repair my credit history?

It depends. If you made a few payments late several years ago, you don’t have as much work to do as someone who has bankruptcies and liens. There’s no ASAP credit repair. In general, improving credit takes months or years. But don’t be discouraged – you can take steps today that will have an impact and get your credit moving in the right direction.

Should I use a credit repair service?

Maybe. You can DIY credit repair. But Consumer Affairs says a credit repair business can help with debt negotiation, disputes and credit monitoring. This is what they do, so they can often get results faster – and with less pain.

However, be wary. Choose a nonprofit credit repair organization that has good reviews. Otherwise, you may spend money on credit repair and still have bad credit.

Credit help in Kansas City

These organizations can help repair your credit. Need more like this? Give us a call or head over to The Resource Navigator to search for other financial resources.

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Determination, Incorporated

Determination, Incorporated is a nonprofit based in the Kansas City metro that creates a pathway to opportunity for formerly incarcerated people through entrepreneurship.