Credit and Credit Repair

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.

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.

Specializes in: Startup Business Counseling

Kansas Small Business Development Center at JCCC (SBDC)

The Kansas Small Business Development Center (SBDC) at Johnson County Community College provides business assistance to aspiring and existing small business owners in Johnson, Miami and Wyandotte counties in Kansas through low cost training events and no-charge one-on-one business counseling.

Specializes in: Startup Business Counseling

Kansas Small Business Development Center at KU (SBDC)

The Kansas Small Business Development Center at the University of Kansas provides free and confidential individual advising to small business owners, managers and prospective owners. The center can work with any company that fits into the Small Business Administration's definition of a "small business."

Specializes in: Startup Business Counseling

Mid-Continent Public Library Culinary Center

The Mid-Continent Public Library Culinary Center is a destination and resource for anyone interested in learning more about food and culinary entrepreneurship. Housed in the Green Hills Library Center, the Culinary Center features a teaching and demonstration kitchen and two shared commercial kitchens for use by startup food businesses.

Specializes in: Startup Business Counseling

Missouri SBDC at University of Missouri Kansas City

Missouri SBDC at UMKC is OPEN for business; both virtually and in-person for our trainings and counseling. Contact us at [email protected] to talk how we can help you SOAR with your entrepreneurial journey

Specializes in: Startup Business Counseling

The Black MasterMind Group Charitable Foundation

The Black MasterMind Group Charitable Foundation is designed to create strategies to help the Black entrepreneurial community start, stabilize, sustain and scale businesses. It educates, trains, coaches, mentors, develops and provides funding initiatives

Specializes in: Startup Business Counseling

The Porter House KC

The Porter House KC is a inner city based co-working community who provides entrepreneurship access and resources to underserved populations in the Kansas City Metro area. Our mission is to be a bridge for underrepresented individuals that typically don't have access to the entrepreneurial dream.

Specializes in: Startup Business Counseling

Accelefund

Accelefund helps aspiring entrepreneurs invest in their companies using retirement savings without paying taxes, early withdrawal penalties or taking out a loan.

Blue Springs Chamber of Commerce

The Blue Springs Chamber of Commerce provides business assistance, networking opportunities and other services related to growing businesses in Blue Springs, Missouri.

Digital Sandbox KC

Digital Sandbox KC provides proof-of-concept resources, including market validation, prototyping and beta-testing support for development of digital technologies within new and existing businesses.

DreamSpring

DreamSpring is a nonprofit community lender providing small business loans and lines of credit, resources and guidance.

Hispanic Chamber of Commerce of Greater Kansas City

The Hispanic Chamber of Commerce of Greater Kansas City is dedicated to the creation, advancement, promotion and development of economic opportunities within the Hispanic market and business community.

Hispanic Economic Development Corporation of Greater Kansas City

The Hispanic Economic Development Corporation (HEDC) is dedicated to improving the lives of Latinos within the greater Kansas City. HEDC achieves this through business development and economic and community wealth creation initiatives.

InterUrban ArtHouse

InterUrban ArtHouse is creating a regional hub where artists can work and prosper in an affordable, sustainable and inclusive environment to drive innovation, economic vibrancy and community culture.

Johnson County Missouri Economic Development Corporation (JCEDC)

The Johnson County, Missouri, Economic Development Corporation (JCEDC) provides confidential one-on-one business assistance, microloan funds, financing options and incentives for new and existing businesses, small to large, for all Johnson County, Missouri.

Kansas City Area Transportation Authority

The Kansas City Area Transportation Authority connects people to opportunities through safe, reliable public transportation. KCATA is a bi-state agency charged with serving the transportation and development needs of the Kansas City region.

Kansas City GIFT (Generating Income For Tomorrow)

Generating Income for Tomorrow’s goal is to create a clear path to economic prosperity and wealth for the African American community in the Kansas City region. We do this by providing monthly grants and support from professionals to Black business owners.

Kansas Department of Agriculture - Agriculture Marketing, Advocacy and Outreach Team

The mission of the KDA Agricultural Marketing, Advocacy and Outreach Team is to serve all Kansans through innovative programming and delivering solutions designed to create an environment that facilitates growth and expansion in agriculture while increasing pride in and awareness of the state’s largest industry – agriculture.

KC Collective

KC Collective was developed by startup founders for startup founders. Through collective collaboration, the organization leverages its networks to provide introductions, mentorship, generous perks and discounts from partners and the education and resources necessary for Kansas City entrepreneurs to move their business forward.

Liberty Economic Development Corporation / LINK Business Facilitation

The Liberty, Missouri Economic Development Corporation is a public private organization dedicated to the growth and prosperity of the Liberty area. LINK Business Facilitation is a free resource for small businesses and entrepreneurs in the Liberty area and is for all phases of business.

Prospect Business Association

Prospect Business Association's Business Development Services Program provides hands-on assistance and back-office support services to start, scale and sustain companies based on their unique needs.

SCORE

The Kansas City SCORE Chapter is comprised of more than 70 volunteers who provide free mentoring and workshops to entrepreneurs. Volunteers are professionals with time-tested knowledge and experience in almost every industry.

Square One Small Business and Workforce Development Services by Mid-Continent Public Library

Square One Small Business Services at Mid-Continent Public Library supports local entrepreneurs through access to information, programs and opportunity. Whether owning a business is a brand new dream or your life’s work, MCPL is committed to helping you succeed.

The Toolbox: Small Business Resource Center

The Toolbox: Small Business Resource Center is the go-to resource for everything small business in Wyandotte County, Kansas. All services are offered at no cost to local residents and businesses. The Toolbox provides support with planning, registering, funding, operating and growing your business through private one-on-one small business coaching.

Credit repair next steps

Credit missteps don’t have to define your entrepreneurial future. You can get it all worked out. And KCSourceLink can help.

We can connect you to resources to help you repair your credit, build your credit, manage your cash flow and learn how to finance your business. Our Resource Navigator can point you in the right direction. And our Network Navigators can work with you to prepare a Personal Action Plan – all for free.

GUIDE: LOANS, GRANTS AND EQUITY FUNDING

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