Credit Cards

Monday, June 11, 2012 at 9:51pm by Site Administrator

Will Personal Credit Card Debt Affect my Ability to Get a Business Loan?

Businesses have their own independent credit histories and scores. Once accounts are opened under the business name, they no longer reflect on the owner of the business or any other individual; the business takes on a financial life of its own. This process does take time, however, and in the beginning, business owners are primarily responsible for the financial health of a company. Their credit history may determine the business’s eligibility to receive credit cards or loans, and some banks may hold an individual personally responsible for unpaid business debt.

Do Banks Consider Personal Debt?

When applying for a business loan, you may need to use your own personal credit history on the application unless the business already has substantial credit accumulated. Since most business loans are issued early in the life of a business, it’s unlikely that your company will have enough credit accrued to evade this.

If you have poor or even average personal credit, you will not be able to get a high loan amount. Your interest rates will be higher and the terms of the loan will not be as amenable as if you have positive credit. You should know your credit score prior to applying so that you will have a realistic expectation of what may occur if the lender reviews your credit with your application.

More than basing your loan amount and terms on your personal finances, this is significant because you will be held personally responsible for business debts if the company falls behind on its payments. Before embarking on any business enterprise, it’s important to understand the impact that it could have on your personal finances.

How to Build Business Credit

  • Get a business credit card. You will probably need to use your personal credit history to apply for the card, but it’s usually easier to get a credit card than a loan. Once the credit card has been obtained, you can begin making purchases in the business’s name and build up the business credit.
  • Use your business credit card for all company-related purchases. Since business cards usually come with rewards programs, you can earn back money for your purchases while improving your credit. Many credit cards come with zero interest for the first few months, providing you with free purchasing power.
  • Put all utilities in the business’s name. If you already have a company address, put the lease, electric, water and other bills in the name of the company rather than your name. This will help slowly accrue positive credit.
  • Sign up with the credit bureaus and self-report. As a business, you have the option to self-report credit, which is not available to you as an individual. Take advantage of that.
  • Ask vendors to report your transactions. Not all business transactions are automatically reported to the credit bureaus. Make sure to ask vendors to report your positive transactions to help build business credit.

Once you’ve begun building your business’s credit, you will have an easier time applying for business-related financing. Banks are not as likely to take a chance on an unproven company as they are a business with a long-standing and successful financial track record. Therefore you will have an easier time getting a loan if you already have taken the time to establish your business’s credit.

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