Starting a business with poor personal credit: Is it possible?

Quick insights

• It could be possible to start a business if you have a poor personal credit score.
• Lenders 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 of the most important aspects 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. If you have a low credit score, you may be worried about your ability to get approved for a loan.

Credit score models often have credit scoring ranges that go from poor to exceptional. If your credit score falls in the poor category as referenced by some models, you might feel this is "bad credit." While there is technically no definition of a "bad" credit score, in this article the term "bad credit" refers to low credit scores.

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 an important part of demonstrating your creditworthiness.

Your personal credit score can be a helpful indicator to lenders of your ability to make your payments. If you have a poor 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 bad personal credit?

If you have a poor 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.

You might also be able to improve your chances of approval for your business loan 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, a business credit card may be difficult to get if you have a poor credit score. Some lenders may offer products that are designed specifically for those with low credit scores, but be sure to review the terms and conditions to ensure you can meet the requirements and fees.

Strategies to improve your credit score before starting a business

If you have the time and determination to improve your credit score prior to starting your new business, there are several steps you can take. These include, but are not limited to:

• Make your payments on time and if possible, in full. This can help improve your payment history, which is a large factor considered when determining your credit score.
• Prioritize debt repayment. Some ways to do this include using the debt avalanche method or debt snowball method.
• Lower your credit utilization ratio. This is the amount of credit you use against your total available credit. Lowering this ratio to 30% or less can help to improve your credit score.
• Create a timeline. Think about the future of your business and what it is you may need. By determining your financial needs ahead of time, you can set your budget for future expenses to help avoid accumulating debt.
• Monitor your credit score. Keep an eye on your score. By following your credit score’s fluctuations, you can make adjustments and find ways to help increase your score further.

Should I improve my score before starting a business?

If you need some credit and have the time and ability to push off starting your business, you could improve your credit score prior to applying for business credit. Doing so could help improve your chances for loan, credit card, and line of credit approvals, lead to larger loan amounts or credit limits, and lower your interest costs.

In conclusion

Starting a business can feel daunting, especially if you face additional challenges such as having a lower credit score. However, with some diligence and determination, you may be able to improve your personal credit score prior to applying for business loans, which can help grant you access to larger lines of credit and lower APRs. Making consistent, healthy changes to your financial habits can benefit you and your business in the long run.