Possessing a bad credit history, is a very common hurdle for individuals who wish to start and run their own businesses. Unless you win the lottery, or have an extremely rich relative, then you are going to have to be able to retrieve a certain amount of capital startup funds. The easiest and quickest way to retrieve capital startup funds is through loans or lines of credit. This can be very tricky for the individual who wants to start a business with bad credit.
First, let's take a look at starting a business as a sole proprietor. The most common mistake for an entrepreneur looking to start a business, is to establish too much personal financial liability in connection with the business debt. A sole proprietorship establishes the absolute maximum liability on the business owner. All business debts are the sole responsibility of the owner, and any outstanding debts, if the business happens to fold, affect the owner's credit and finances directly. Keep in mind, that 80% of small businesses fail within the first five years according to numerous government reports. Sole proprietors who have the business debt tied to their personal finances, will be 100% liable, when those businesses fold.
Next, let's take a look at starting a business with a partner. The second most common mistake an entrepreneur looking to start a business makes, is in thinking that they can lessen their liability by taking on a partner. This is a very common myth, because if and when, they business may fold, the personal finances of both partners suffer equally. Yes, it is better to have two or more partners, to shoulder the financial load, however, if the business itself is the sole means of paying for all the financial responsibilities, then whether there are two partners, or fifty partners, whenever the business fails, then everyone's finances and credit suffer equally.
Now, let's take a look at corporations. Ah yes, there is a light at the end of the tunnel. What is a corporation? A corporation is a continuous independent entity which is created by an association of individuals, under authority of law, which has independent powers and liabilities from the members of its association. Okay, that's the dictionary definition, but in laymen's terms, a corporation is like another individual, with another social security number, which can file its own tax return, declare bankruptcy, and has all the powers and liabilities of an independent business owner.
What this means, is that if the corporation fails, then the individual who runs the corporation has absolutely no liability whatsoever. A corporation simply dissolves into thin air when it fails. In this way, an entrepreneur who starts a corporation, has absolutely no personal financial risk or liability. An entrepreneur can start multiple corporations which may fail, without affecting their personal credit or finances in a negative way.
Okay, so if I have bad credit, then how does starting a corporation benefit me? Since a corporation is a new entity, with a new social security number, then the corporation has no bad credit. This means that the corporation can now apply for loans, credit cards, and any other type of credit. The individuals who run the corporation may have terrible credit, however this has absolutely nothing to do with whether or not the corporation's credit is good or bad. Many banks and credit card companies, are much more willing to give corporations higher credit limits, with much better terms, than individual business owners. An entrepreneur with bad credit can start a corporation, and receive credit based upon the corporation's credit history, without every having their borrowing history checked. Many entrepreneur's with bad credit, have utilized the corporation's limits of liability and borrowing potential, to attain massive amounts of startup capital to fund business projects, which they themselves would have never had the opportunity to fund otherwise.
The bottom line: if you have bad credit and no capital, then start a business as a corporation. This will limit your financial liability, and give you the opportunity to attain capital based upon the corporation's credit history, not yours.
Here's what you have to do:
Find out what your credit score is before you approach any financial institution about a loan. Maybe it won't be as bad as you think, but you won't know unless you check it out. That means getting your report from all three of the major credit-reporting bureaus: Equifax, Experian or TransUnion. This way you'll find out exactly where you stand.
There's another benefit here as well. It's possible your report may contain errors: a late payment, for example, you know you made on time. Or a claim of a missed payment, when you have the canceled check to prove it was paid. Errors do occur, and if you find any, now is the time to get them corrected, before you go out looking for business funding.
But let's say that after checking your credit report, you determine that it's correct, and yes, your credit comes up less than stellar. What do you do then? Get moving!
One thing potential lenders really dislike seeing is late or missed payments. If you had a good reason for that error (family emergency, out of country, hospitalized, etc.), write a letter of explanation to the credit bureau. It's possible you could get it lifted from your report. You could also enlist the services of a credit repair company, if you don't know where or how to start. And those high interest credit cards you've been carrying balances on? Pay them down to 30% of the credit limit as quickly as possible.
And a word about credit cards: Those colorful little pieces of plastic you're carrying around are probably worth thousands in credit. If you're like most folks, the temptation to use them to pay for less-than- necessary items (do you really need another flat screen TV?) could be a problem. If you can't control your personal spending, do you really think a loan officer will think you can control your business spending any better? No! It really isn't that hard to do, and whatever credit problems you might have, can be overcome by good financial management. You can do it if you want to.
Straighten out your credit problems well before going to any bank. While loan officers look fondly on borrowers with excellent credit, they also appreciate those with less-than-perfect credit who have recognized and corrected the situation. It says a lot about you and your worthiness to receive a loan. The key is to start establishing your business credit so that your personal credit doesn't become as important. You should start doing this immediately, even if your business is a start up. There are lenders that will loan to start ups as well as established businesses but you must have your business set up correctly as a business and not as a hobby. You can work from your home and still be a legitimate business as long as all your documented information (EIN, State filings, business licenses, business phone number and address) is consistent. This is the key to unlock the doors to business funding.
And finally, one last word about credit: Once you do get your lines of credit or business credit cards, never, ever think about co-mingling your business and personal credit. Keep credit cards separate, as well as bank accounts. The temptation can be awfully strong to co-mingle, but it's a path you don't want to go down.
Both Bryan Pringle, Ph.d. & Pat Gage are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Bryan Pringle, Ph.d. has sinced written about articles on various topics from Credit Cards, Business Credit Cards and Credit Cards. For more information about credit cards and how to please. Bryan Pringle, Ph.d.'s top article generates over 4400 views. to your Favourites.
Pat Gage has sinced written about articles on various topics from Start Ups, Personal Desktop and Business Credit Cards. Pat Gage, The Opportunity Creator is not only a sought after business credit coach but also a national speaker. For more information on any topic discussed, visit Pat Gage's site at. Pat Gage's top article generates over 8100 views. to your Favourites.