Repair Personal Credit to Establish Business Credit

You don't have to restore or repair your personal credit to establish business credit, but it definitely makes things easier. When you build corporate lines of credit with poor personal credit, you get poor quality credit lines, like we'll discuss below.

When you apply for corporate credit, especially in the first two years, lenders will always ask for the social security number of the owners of a small business, for the purposes of running a credit check. Most newly formed businesses rely on borrowing the personal credit of the owners in the beginning to get the business started. It's the most common form of OPC (Other People's Credit).

Once the business credit line is obtained using your personal credit score, it will only report on your personal credit report if the loan isn't paid and goes into default. Otherwise, the business credit account doesn't show up on your personal credit records. Some people call this a loophole in the system, but really it makes sense.

The practice of borrowing OPC isn't new. For most of us, our first auto loan or maybe even mortgage required a co-signer. That's borrowing OPC to get started growing a history and track record for you. This is exactly what your business does in the first couple of years.

When a new company starts building credit, it doesn't have a history or track record. Just like a teenager buying their first car, it needs a credit reference and cosigner. For your business, the credit reference is your personal credit score. The cosigner is the personal guarantee you give.

That's why it's easier to build corporate business credit when you start out with good credit. Your initial credit lines are only as good as the cosigner you're using to borrow the line. If your personal credit is poor, your initial business credit limits are smaller, with a much higher interest rate.

When building business credit, usually the owner will be required to personally guarantee loans that are offered by banks or other financial institutions. In fact, when you're looking for unsecured lines of credit for your business, a personal guarantee is inevitable. A personal guarantee means that if the business can't pay for the loan, you agree to pay personally. Again, this is exactly like being a cosigner for your business.

Once you've spend some time developing a foundation of business credit, you may be able to obtain more loans without a personal guarantee. Sound familiar? Again, it's just like a teenager getting their first car loan. Once they have the loan and establish themselves as a good borrower, it gets easier and easier to obtain financing without relying on OPC. Good personal credit was the backbone of this entire business credit building system.

However, there's another kind of unsecured business credit line available. Sometimes funding comes in the form of trade lines (credit extended by companies that have business-to-business products or services). These are often available without personal guarantees. Trade lines are made to new companies just building their profile, but trade lines are limited in the amount and availability. Many trade lines have to be used to purchase specific products or services, like office supplies.

With a low personal score, you can build good business credit, but your credit lines will be lines for borrowers with bad credit. Which means you'll pay higher interest rates, have smaller amounts available, and they will usually be these trade lines.

The bottom line? While you're growing your business credit trade lines, work on improving your personal credit, don't ignore it. Having both a good personal credit score and a good business credit score will ensure that you get all of the financing you need for your company.

To learn more, consult with the experts at CL King and Associates. We co-manage bond offerings, IPOs, follow-ons, secondaries, convertibles, and preferred. CL King has acted as Co-Dealer Manager on Verizon’s $1.9 billion cash tender offers for 8 series of debt securities of Verizon and many such big companies.

Or visit here: http://www.clking.com/

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