The Role Your Personal Credit Score Plays in Start-Up Financing

3 min read ·


by Michael Germanovsky

When people think of starting a business, one of the first things they might consider is writing a business plan. Identifying a source of funding is a large part of it. A successful business takes cash flow to sustain it and investment to grow it. We all know investors are hard to come by. So there are two basic ways to fund the start-up costs for a small business. One way is a traditional business loan and the other is a line of credit.

If you have an entrepreneurial spirit, then be kind to your credit and it will be there for you when you need it. Your credit does not have to be perfect to get a loan or credit extension to start a business, but the better your credit history the better your chances to obtain start-up financing.

About half of small businesses fail within the first five years, according to the Small Business Administration (SBA). Even with low start-up costs and low overhead there are still going to be those times when credit is needed in the beginning. Credit is a great option for those unanticipated instances when funds may be lacking due to a variety of circumstances.

Many emerging entrepreneurs mistakenly believe that by registering a corporation they can obtain a credit by only using their new business Tax Id. It is not entirely so. To establish your eligibility, the bank will calculate a credit score by using your personal social security number. By doing so, the bank will evaluate your personal credit history and assess their risk. This score is not the same score you receive from the three major credit bureaus — TransUnion, Equifax, and Experian. It is calculated by each bank's proprietary risk formula, which is often based on a model devised by Fair Isaac Corporation (NYSE: FICO). The better your credit scores, the higher the chance your small business will have longevity. There are ways to improve credit score, but understanding how your credit history influences it – is paramount.

Your personal credit history has a major impact on your credit score. While a lender may consider your assets and equity stakes, your debt repayment habits determine not only the size and type of loan or credit extension you may receive, but also the percentage rate as well. Just a few percentage points difference on a large line of credit or loan can cost thousands of dollars. For instance a 5% difference (10% compared to 15%) in APR on a $20,000 debt carried for five years can add up to a difference of over $3,000.

As your credit history is being recorded by the credit bureaus, there are times that a negative report may be recorded in error or become outdated. You have an opportunity to dispute any negative report on your credit history. This is why it makes sense to look over your financial history before considering funding your business with credit. If your credit history is not good, then you can even be denied for a loan or credit extension. And without a list of potential investors, you should probably keep your day job.

There are some instances of tarnished credit history that a bank may overlook. Just because you have made a mistake in the past does not necessarily disqualify you. If the owner has some equity in a new business, this can positively influence the decision of a lender. Banks assess their risks based on many factors, including your assets.

There is also a human factor – if a customer has a consistent pattern of on-time payments followed by a short period of non-payment, the person's good history can be taken into consideration. Ultimately the decision lies in the hands of the lenders. Taking targeted action to improve your personal credit score now is vital for the success of your future business.

Michael Germanovsky is a personal finance expert with in-depth knowledge of credit cards, charge cards, and pre-paid cards. In 2011, Germanovsky created the Student Credit Card Education Initiative and sounded awareness of high interest rates. Michael is editor-in-chief at