Starting a business with low personal credit: Is it possible?
Quick insights
- It could be possible to start a business if you have a lower tier personal credit score.
- Lenders may consider your personal credit (and business credit, if you have history) when determining your loan eligibility and interest rates.
- It may be helpful to improve your credit score prior to applying for a business loan or business credit card.
You’re about to begin your adventure as an entrepreneur—this is an exciting time and you may be filled with all kinds of questions. One aspect of starting a business is funding, and if you're looking for outside help in the form of a loan or a credit card, your credit score could come into play.
How your personal credit affects business financing
Your personal credit score can affect your ability to get approved for a business loan or business credit card. While lenders do look at your business credit if you have history, your personal credit history may also be reviewed and is one of several factors in demonstrating your creditworthiness.
Your personal credit score may be an indicator to lenders of your ability to make your payments. If you have a lower tier credit score, it may imply that you could have trouble repaying debts towards a future business loan. However, your credit score is just one of several factors that lenders consider when determining your eligibility for business loans and business credit cards. They may also consider, for example, your debt-to-income ratio and employment history.
Is it possible to get a startup loan with poor personal credit?
If you have a lower tier personal credit score, you may want to consider other avenues. For example, you could look into the Small Business Administration (SBA), which may offer programs or loans that could potentially help those with lower credit scores.
It may also be helpful if you add a co-signer. A co-signer becomes responsible for late or missed payments should you be unable to make them yourself. This could help lower your risk as a candidate for a loan or line of credit.
Is it possible to get a business credit card with poor personal credit?
Similar to business loans, your credit score may be considered in your application for a business credit card. Some lenders may offer products that are designed specifically for those with lower tier credit scores, but requirements and fees may vary. The terms and conditions section of the application typically includes important details.
Strategies to improve your credit score before starting a business
Improving your credit score is possible, but it takes time and thoughtful financial behavior. Some strategies include:
- Making your payments on time and if possible, in full. This may help improve your payment history, which is a factor considered when determining your credit score.
- Prioritizing debt repayment. Some approaches include using the debt avalanche method or debt snowball method.
- Lowering your credit utilization ratio. This is the amount of credit you use against your total available credit. A credit utilization ratio of 30% or below is generally considered favorable.
- Creating a timeline. Understanding projected business expenses is one factor that may inform budgeting for future costs.
- Monitoring your credit score. By following your credit score’s fluctuations, you may be able to make adjustments and find ways to help increase your score further.
In conclusion
With some diligence and determination, you may be able to improve your personal credit score prior to applying for business loans. Making consistent, healthy changes to your financial habits may benefit you and your business in the long run.
