It’s been a tough few years for small business. Robbing Peter to pay Paul takes a toll on individual and business credit ratings. Although there are lots of options for small business financing, the first thing most lenders expect to see is your credit score. For idea-stage start-ups, and those with only a couple of years in business, your personal credit carries a lot of weight. That’s not to say small business owners with less than ideal credit can’t find financing—but an idea-stage company and a founder with no track record, no income, and bad credit is likely not going to get a loan.
Knowing that, the list of options narrows:
- Bootstrap your endeavor: Lots of small business owners finance the first couple of years with savings, a second mortgage, or income from a second job. Although it might not be the best option, unless you’re a sexy tech company that can demonstrate to an angel investor that your idea can scale quickly and they can recoup their investment (with a tidy profit) quickly, it might be the only way.
- Turn to friends and family: I lump peer-to-peer lending and crowdsourcing in this category.
- Spend time to rebuild your credit: Nobody wants to be told that they need to put their idea on hold to spend time rebuilding their credit, but sometimes that’s the only option. Particularly if you are idea-stage, don’t really have a business or track record yet, have no income, and your credit is poor. The year or two you spend on rebuilding your credit could make all the difference between a successful business down the road or a flop now. Lack of capital is one of the leading reasons businesses fail or stagnate. Unless you’re business has a great cashflow coming in, you’ll likely need credit to grow and thrive.
Although this may sound like an oversimplification, here are some suggestions to help you get started on your credit restoration project:
- Pay your bills on time: There are lots of reasons a small business owner might be late paying their bills. Many of them have nothing to do with the ability to pay. Because late payments or collections can be devastating to your credit score, make it a priority. Many companies even offer early payment terms—an extra two or three percent discount if you pay within 10 days, for example. Over the course of the year, that extra percent or two can really add up. I know how it feels to let other priorities push off taking the time to sit down with the bills. It’s a bad habit and can negatively impact your ability to rebuild your credit.
- Keep your balance low on credit cards and other “revolving credit.”: If you have high outstanding balances on several revolving credit accounts, it will negatively impact your credit rating.
- Don’t open more credit accounts that you really need: opening new accounts just to improve your “credit mix” doesn’t work. It won’t improve your credit score and may negatively impact your ability to get loan.
- Pay off debt rather than move it around: Consolidating multiple credit cards into one debt doesn’t help your credit rating if the debt amount is the same. Owing the same amount but having fewer open accounts may actually hurt your credit score.
This is the last thing an entrepreneur with bad credit wants to hear, but it’s the bitter pill that many small business owners sometimes need to swallow. It takes time to repair your credit, so don’t expect things to change overnight. There’s no quick fix—but it’s definitely worth the effort.