Bad personal credit is a common stumbling block for first-time entrepreneurs. Often, the motivation for going into business is to make more money, indicating that they are not making enough money working for others, thus, bad credit. Working for yourself is the best opportunity for building wealth, and the sooner you get started, the better. Bad credit among entrepreneurs is more common than you think and can make the startup process slightly more difficult, but is not a total barrier in itself.
If your credit is pretty good but with some negative entries, it may be worth the effort to dispute inaccurate information and negotiate with creditors about removing negative entries. If you have several delinquent accounts or other derogatory information on your credit report, it takes months (at least) to bring your score up, even if you do everything right. Do not even consider the “credit repair” services — the FTC has yet to find a single legitimate firm. The trickery they attempt to clean your credit report is bogus and at most will remove negative entries temporarily. If the information on your credit report is accurate, it is probably going to stay there for the seven years the law allows. You are better served spending your time finding creative ways to get your business off the ground than trying to “fix” the unfixable.
The primary complication of launching a startup with bad personal credit is funding the business. Banks rarely finance startups anyway, but bad credit will make it impossible to obtain a bank loan for your business. Same with the SBA loan guarantees — because the SBA programs ultimately rely on you qualifying for a bank loan, excellent credit is required to get in the door. Even local economic development not-for-profits generally include credit score limits to qualify for government funded microloans. Generally, your credit score must be over 680 to even be considered, and anything below 620 will likely torpedo your chances. Not to worry, most businesses are launched without bank loans, and if you are driven to open the doors, you will find a way to finance your idea.
The other downside of starting up with bad credit is that some things will be more expensive and some necessities may be more difficult to secure. First, most businesses will need merchant services, the ability to take payments from credit and ATM cards. Your personal credit is a major factor in securing these services, and the regular banks are quite strict about who they approve. Fortunately, there are alternative merchant services firms that specialize in “high-risk” applicants. You will pay higher per transaction and percentage of sales rates, but you will at least have the ability to accept credit cards. If your business can be conducted over the internet, you can also obtain a Paypal account without a credit check…they accept both major credit cards and checking account drafts and their rates are usually better than the high-risk merchant services. Being flexible can overcome many of the issues associated with less than perfect credit.
Some suppliers request a personal guarantee and credit check before providing terms. If you don’t qualify, you may be required to pre-pay your business’s orders or pay more for terms. In most cases, you will have multiple vendors to choose from and there may be some who do not require a credit check. If you don’t need to purchase on credit, making your first few orders prepaid can avoid the personal credit issue completely. Shop around for the best deals, but avoid having multiple vendors run a credit check — believe it or not, inquiries lower your score even more.
Register your business with Dun and Bradstreet (under the EIN) as soon as possible to begin building business credit, and use the EIN on contracts and to apply for terms whenever possible. It takes time to build business credit, but eventually you want to be sure that the business liabilities are completely independent of your personal assets.
Don’t let negative credit stop you from pursuing your dream of owning a business. While some things may be more difficult, there is no hard and fast rule that bad credit means you can’t succeed in your own business. If anything, it will force you to be more conscientious about how you spend your startup capital and keep you focused on building your business with an eye on profitability.
— K. MacKillop, a serial entrepreneur with a J.D. from Duke University, is founder of LaunchX and authors a blog focused on starting a business (https://www.blog.launchx.com/). The LaunchX System’s comprehensive, step-by-step approach to starting a business will help you develop the knowledge and skills you need to make your business startup a success. Visit https://www.LaunchX.com/ and take our Business Readiness Assessment and learn what to do next for your business startup https://www.launchx.com/are-you-ready.html