How Your Personal Credit Score Can Affect Your Business’s Loans

By Linsey Knerl

According to a 2009 report from the IRS, the creation of sole proprietorships is on the rise, meaning that many small businesses are actually a company of one.  While banks like to see businesses with established credit histories of their own, they’re willing to look at personal credit histories of the owners for new companies, especially for sole proprietorships. While there are many benefits to operating this way, there can also be some risk – especially if you are looking to secure financing for a startup or expansion.  Remember these common factors when shopping for your next loan:

Length of Credit History:  Someone with a more established credit history will likely be able to access a greater variety of funding for their small business than someone who is new to the credit game. Old accounts kept in good standing can increase a score overtime, so be sure to keep old accounts open, even if you never intend to use them again.

Age:  With the recent passing of the CARD ACT, young entrepreneurs who want to start a business and borrow money before the age of 21 will have a difficult time without a co-signature from a parent or guardian.  Since many of the brightest startups occur during the college years, this could have a negative effect on the business landscape as a whole.  Establishing a credit score for future loan activity will also be delayed.

Late Payments:  Just one or two 30-day delays having a significant impact to your personal credit score.  Since it takes years for these errors to fall off your history, it is always in your best interest to pay all accounts on time – even early, if you can.  It is recommended that you also check your free credit report annually from all three reporting agencies to guard against erroneous reporting.

Credit Utilization:  Having a number of credit lines available to you can keep your score healthy, provided you don’t use up too much of that credit.  Keeping the percentage of used credit to total available credit to a healthy amount (40 percent or lower) is recommended for maintaining a high score.  Anything above this can lower it to a level that could disqualify you for certain small business funding.

As the credit score rules change over time, the numbers may have new meaning.  A score that was considered “average” just four years ago has more borrowing power in this post-recession economy.  For those who have managed to keep their credit score above a 750 or even 800, the outlook for financing your small business may be a good one.

Linsey Knerl is a staff writer for CreditScore.net. She’s written extensively about personal finance topics, while raising five home-schooled children on a farm. Follow Linsey on Twitter @lknerl.

Photo courtesy: Karen Axelton

This entry was posted on Thursday, February 17th, 2011 at 9:00 am and is filed under Capital Access, Small Business. You can follow any responses to this entry through the RSS 2.0 feed.


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