Many things have to be done at the beginning or the outset of starting a business. A lot of effort is put into creating a business plan – choosing the type of business, hiring the right people, and taking care of the needed legal documents. One of the most important among those is having a good credit history to allow for funding your business. Luckily, even if you don’t have good credit, there are multiple ways of funding your startup. By the end of this article, you will be able to identify what these ways are and how you can start your business even if you don’t have a good credit history.
Starting with No Credit
Starting your own business might not require any credit at all. However, this is based on the type of service you provide and the initial expenses needed to start it. For instance, if you start your own web designing business, you will not need any credit at all to fund or run your profession. In similar cases, starting would just mean choosing your brand, giving it a name, selecting the entity type, filling up the required legal forms, and applying for the license needed by the selection you chose. With some types of businesses, you will need to open a business bank account to separate your business funds from your personal funds. This also applies to sole proprietorships and partnerships but it is not legally urged. For all cases though, the bank account you create can be a simple business checking account that doesn’t have any related credit lines. Its approval will also be easy and will require no strong credit history. As simple as it is, this only applies to small businesses in their initiation, however, if you choose a more complex business that requires more funding, then starting this business might require credit.
Bank Finances and Home Equity Loans
To get financial support from a certain bank to fund your business, the bank would go through several things that may relate to your credit profile. They will examine your credit history, positive cash flows, your collateral, and your character. This has changed recently though, and most banks or financial institutions would direct their attention to one thing and that is your credit history. When lending applicants from small businesses, it is more likely your bank will reject your loan if you have a credit score that is below 650. The process of automating the decision making in most banks and eliminating the system that used to work for meeting applicants in person has led to creating automatic lending decisions that depend on the applicants’ credit scores. This means that even by having a good business idea, the required work experience, and a determined personality, you will still not be able to get a loan without a good credit score of at least 600 or above.
There is a simple solution to this problem though, getting a home equity loan. For this, you will not need good credit to get the loan, just the willingness to fund your business with personal equity from your home. This will allow you a lot of options without having to worry about securing a good credit history, and all you will have to do is to watch out for using it too early within your project’s life-cycle.
Business Credit and Its Benefits
Big banks will focus on your personal credit score which is determined based on many factors including the outstanding balance on any of your credit cards, bill payment history, and how many open lines of credit accounts you have. However, small lending institutions and business-friendly banks will go through both your personal credit score and your business credit score. A business credit score is like your personal credit score, it is based on related factors except it is connected to the tax ID of your business rather than your social security number. All of this means that even if you have a bad personal credit score, you can apply for having a separate tax ID number for your business and build a new business credit score.
We will get into how you can build a business credit score further in this article. But the benefits of having business credit include enjoying the ability to jump into rare business opportunities or partnerships, and making use of business credit cards. Credit cards can be used to handle large business expenses; you can learn more here about how credit cards can help you fund your project and provide you with rewards and offers the more frequently you use them. When funding your business using a business credit card, you get to earn rewards that can be related to your business, which will help you kickstart it with the right equipment. You just need to make sure you pay the balance in full and avoid the interest costs to increase these offers and rewards.
Building a Business Credit Score
After creating a tax ID number for your business and legal identity, you will be able to start building your business’s credit and qualify for lines of credit from big suppliers and other sources of capital. Many companies now are dedicated to track businesses’ credit and provide cooperating banks with business credit reports that identify if a certain business can qualify for a strong credit rating. These reports would list information about your business’s performance, open credit lines, credit cards, any form of loans, and business partners and associates. This means that this information decides on your business score or rating and shows the participating banks how committed you are to paying your debts. This leads eventually to having those banks trust you and support your business or even offer you business loans.
Bottom line is, if your personal credit score is not good enough, you can always create a trusted business credit score to earn the trust of big financial institutions that can help you finance your projects. The most important thing is to pay your business bills and debts on time and to pay them in full to build a good business credit score. You can also have a data company to collect enough financial information about your business and use it to achieve a higher credit rating with lending institutions. So technically, you don’t need a good personal credit history to start your own business.