It’s not uncommon for small business owners and entrepreneurs to tap into personal credit to keep their companies going, but when it’s time to ask for a business loan you need to know how they’re tied together.
“Absolutely will a bank look at your personal credit history if you’re applying for a business loan,” says accountant and lawyer Shannon Nash, president of Nash Management Group in Atlanta and Los Angeles. “They’re trying to figure out what’s risky and what’s not risky and determine if anyone will default on a loan.”
Entrepreneurs should be acutely aware of how their personal financial decisions could affect their business. Ylisa Sanford Seymour, a senior financial adviser with Ameriprise Financial who has offices in San Francisco and Santa Rosa, Calif., recalls a business owner who was considering defaulting on a real estate loan because of the tough economic times. His banker told his client that if he walked away from that property, the bank would pull his business line of credit.
New business owners may not have much of a business credit line to show to a bank and need to make sure that their personal credit is strong. Any bank will run a credit report on an applicant so it’s important to review your report even before you apply for a loan, says Nash.
Your Credit Score on Steroids
A credit score of 700 is OK, but not even considered “good” these days, says Nash, adding “if your credit score falls in low 600s it will be very hard to get a loan.”
Sanford Seymour says it’s not uncommon for banks to require scores above 800 in order to get a loan.
“Get the report and work on cleaning it,” says Nash. “Don’t sugar coat the situation. Tell the bank here’s the problem and I fixed it. “A business needs to show that receivables are coming in, you have a great concept and what dragged down your score was something in the past that you’ve changed.”
One of the biggest red flags on a credit report is a customer who pays utilities late, says Sanford Seymour. “They are such basic necessities and it will immediately drag down your report if you don’t keep current on all payments.”