If you want to start a business, but have a poor or non-existent credit history, you might wonder what options you have.
Here are a two simple tips that you should know that will help you get the business funding you need.
In the past, bank financing was based on the 4 Cs of credit which are: credit history, cash flow, character and collateral. The problem is that this is no longer true for the largest financial institutions.
Three of these points have been left in the past as banks generally focus only on credit history when making decisions about small business applications. This is due to the consolidation of the banking industry which has caused banks to automate decision-making processes.
Big banks have also minimised the labour involved in vetting credit applicants. This means that you can have a great business idea, but if you have poor credit you will struggle to get funding from major banks.
You could have a great idea, relevant work experience and a strong character, but with poor credit history, you will not get any funding. It is important to note that there is one exception to this in the form of home equity loans.
However, you will still need to be willing to secure your business loan with your home which has equity in it. You need to be careful with these loans in the early stages of your business because cash flow can be hard to forecast.
Large banks will focus on your personal credit score, but smaller lenders, unlike traditional banks, are more business-friendly and are going to look at a combination of factors.
These factors will be: your personal credit score, the business credit score, and factors that impact the viability of your business.
Personal credit scores are determined using several factors such as outstanding debt on personal credit cards and the number of credit accounts you have. The payment of bills and your late payment history will also be taken into account.
If you have a poor personal credit score, you might still be able to get funding through alternative credit metrics. While it is important to diversify your credit references, you need to separate your business and personal credit scores.
To do this, you need to consider a separate business address which is not a post office box and a separate bank account. A separate telephone listing should also be considered. These small changes to the administration of your business may seem minor, but they will play a large role in distinguishing you from your business for a long-time funding solution.
Tammy Richards is a seasoned finance writer with over 15 years of experience in the industry. With a keen eye for detail and a passion for helping people make smart money decisions, Tammy has become a trusted voice in the world of personal finance. Holding an MBA and drawing from her extensive entrepreneurial background, she offers valuable insights and practical advice to her readers.
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