Anyone who’s missed a credit card payment even once knows the feeling: Absolute dread in the pit of your stomach and a paralyzing fear that your financial prospects are ruined.
If you own a business, that nagging worry about keeping up with your credit cards, payment history and FICO score doubles! Suddenly, you have your personal and your business credit reputation to track.
You should keep your personal and business finances separate when you kick off your entrepreneurial journey. But your personal finance management could still impact your business credit reputation more than you might expect.
Here are some aspects of credit to consider before you sign up for every credit card that has a good points plan.
Your credit history
If you have limited credit history -- for example, you’re starting your first business -- a bank or other lender will rely on your personal credit to make a judgment of your financial trustworthiness. If you’re a young entrepreneur, you may need to have a cosigner ready to vouch for your responsibility.
Many business lenders, regardless of your experience in small business ownership, will examine your personal credit score when they consider your application for a business loan. If you have a low credit score due to poor payment history or bankruptcy, it can send a signal to lenders that you’re not ready to manage business finances.
Your credit score
If you’re applying for a loan through the SBA, make sure your personal financial house is in order. Intuit reports that only 13 percent of SBA loan applicants get approved. If your FICO score is below 700, Intuit warns, you may not have a chance.
But financing options are available to business owners with all types of personal credit histories. Intuit notes that an angel investor may not be concerned with your personal finances but rather focuses on the business’ potential to earn. Similarly, if your business has been operational for long enough to show steady revenue and good cash flow, your credit score may not be consulted.
Your business plan
Your business plan can reveal elements of your personal finances that could raise questions when seeking a loan or investor. Did you note an owner’s salary in your business plan? Is the number reasonable and in line with what you might have made in your last full-time job? It feels good to call the shots in your own business, and it’s important to budget for your own salary when you’re planning for success. But an exorbitant starting salary for yourself could be a red flag to potential investors.
Your business credit card could affect your personal credit history
A credit card can help you build business credit history and help get your business on its feet while you work on loan applications or investor pitches. But pay attention to your card issuer’s policies before you sign up. If your name is on a credit card you use for business purchases, that card’s credit history could be included in your personal credit report -- even if you’re not a sole proprietorship. It all depends on which credit card company you choose and how they report your payment history. Bottom line: If you’re planning to use credit cards to pay for business expenses, treat them with the same diligence you would apply to your personal credit habits.
Not sure if you and your business are credit worthy? Get in touch with a SCORE mentor to review your situation, and make a plan for future success.