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The Truth About Small-Business Credit
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Article 1: Your Personal Credit Affects Your Business
When Andy needed some costly machinery for his burgeoning carpet cleaning enterprise, he figured he would have no problem obtaining a bank loan. After all, his business always paid its bills on time.
To Andy’s surprise, his business track record seemed to carry little weight. Instead, the bank insisted on running a personal credit check on Andy before granting his loan.
Amy needed $10,000 worth of raw materials to ramp up her production of seasonal gifts that wouldn’t sell for several months. Figuring her long-time vendors wouldn’t hesitate to agree to her request for 90-day terms, Amy submitted her corporate purchase orders.
Amy was surprised: Even though her corporation had a sterling financial reputation, her vendors asked her to sign a form allowing them to investigate her personal credit rating. That’s not all: They required her to sign documents that personally guaranteed the money if her corporation didn’t live up to its agreement.
Like Andy and Amy, you’ll likely find that your personal credit rating has a tremendous impact on your ability to obtain business credit.
Maybe your business has paid all of its bills on time, but if you’ve fallen behind on some of your own payments, your ability to obtain funds will likely be hampered. A cloudy personal credit rating often means higher interest rates for bank loans, business credit card accounts and vendor terms. Indeed, if your personal credit is bad enough, your business may not be able to borrow funds at all.
What’s the reason for all this? Creditors often view you and your business as equivalent entities. They know they will need to pursue you as an individual if your business doesn’t come through.
“A business which is a sole proprietorship does not have an existence separate from its owner,” notes Robert S. Bernstein, partner at the Pittsburgh-based Bernstein Law Firm.
“If the entrepreneur has not created an entity such as a limited liability company or a corporation, then absolutely the creditor is going to look to the entrepreneur’s credit before extending terms. Even if an entity has been created, if it has no credit standing on its own, then any vendor with any sense is going to ask the individual to guarantee the account.”
Lesson learned: Smart business people get their personal affairs in order. Good business credit depends on good personal credit.
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