One thing a new business owner in America quickly discovers is that when seeking a new business venture in this great nation, bankers look at the owner first and then look at the business. In this initial stage of a business venture, a personal financial picture identifies what financing sources are even a possibility. Such practices are even truer in developing start up business credit because a personal FICO Score opens this door initially. In America, a new business will have little to no operating history, revenue patterns, or business references. This means that bankers and other funding sources depend mostly on the creditworthiness of the new business owner. Learning this relationship can benefit you and enable you to leverage your start up business credit while you are building it.
The Importance of Personal Credit for Early-Stage Businesses
Your personal credit shows how responsibly you have managed debt throughout your life; therefore, lenders use this information as a proven measure of your behaviour over time. When starting up, however, your business has yet to build this level of respect with its lenders. A good personal credit score gives business founders the ability to obtain early business financing while establishing a foundation for start up business credit development. When your personal credit score is high, it means you consistently make your payments on time and maintain a low ratio of debt to available credit. These indicators of financial responsibility reduce the lenders’ perceived risk when lending to you, thus allowing them to offer you lower interest rates, higher loan amounts, and more flexible repayment options.
What FICO Scores Lenders Usually Anticipate
Most U.S. lenders consistently use FICO scoring models when deciding on loan applicants. Although precise standards differ, some basic guidelines are as follows:
- 720 and up: Top level for getting financing at the best rates and lowest cost
- 680-719: Most lenders will approve you in this category and you will be offered some competitive choices
- 640-679: There will be some banks offering you credit but at a high cost
- Below 640: You are really struggling for approvals without collateral or very high cash flow
These scoring bands have a direct impact on the speed with which you can obtain start up business credit as well as the conditions of the credit.
Personal Guarantees and Early Credit Products
In most founders of startups, lenders always ask for a personal guarantee. This implies that if the startup fails to repay the loan, the owner takes responsibility for the burden of repaying the money. Even with the risk, the owner can apply for a start up business credit in case the business has no history. Typical early-stage products offered in relation to personal credit are:
- Business credit cards
- Vendor accounts with net terms
- Revolving credit lines for entry-level employees
By using these products correctly, entrepreneurs can begin to establish two separate financial identities,i.e, personal and business finances, and improve their start up business credit.
How Personal Credit Impacts The Borrower’s Terms for Loans and Cost to Fund Loans
Having a great personal credit score provides the borrower with more than just the ability to get approved for a loan; it also allows the borrower to pay less in terms of fees and interest and get longer loan repayment periods. A strong personal credit score will help the borrower reduce their capital costs during the time when they are at the highest risk of failure (growth). When a borrower has a weak personal credit score, they may still be able to qualify for a start up Business loan, but it will typically come with higher interest rates and shorter loan terms than what they would receive if they had a strong personal credit score. Over time, these additional costs will constrain cash flow and hinder the borrower from growing their business. Therefore, it is critical that the borrower manages his/her personal credit score early in business formation.
Moving from Personal to Business Credit Independence
The ultimate goal of the founder is to gradually become independent of personal credit. When you keep paying early accounts on time, keep your credit utilization low, and get some new trade lines, your company starts getting its own financial identity. Once business credit gets stronger, lenders will depend less on the personal guarantee of the business owner. This change will give the company the opportunity to borrow larger amounts of money through credit facilities and have a wider range of options for start up business funding without the owner’s personal assets being at risk.
Conclusion
In the U.S. market, business credit relies on personal credit as the connecting factor for entrepreneurs seeking initial funding. Taking advantage of an excellent FICO score gives entrepreneurs the ability to acquire funding faster and at lower rates of interest, boosting credibility until the business reaches full maturity. Personal credit, when appropriately utilized, serves as an asset and not an obstacle in establishing sound start up business credit.
