(Cheryl from Pennsylvania) I want to start my own buisness but I have bad credit. Do I need good credit to start a business?
Dear Cheryl:
You do not need good credit to start your own business. Your efficient use of your time and careful attention to costs will help you build your business carefully and avoid the pitfalls of taking on too much debt to grow a business.
That being said, you may have fewer options to grow your business if your credit rating is poor. New businesses do not build their own credit rating. Instead, creditors will rely on your personal credit rating to determine whether they should lend money to the business. If your credit scores are low, then you will have a difficult time raising additional capital that might be necessary to increase the scale of your business.
Running your business out of your home is an easy way to avoid high costs of renting office space. Additionally, you do not have to worry about passing the landlord’s qualifications for being able to afford rent payments over the life of the contract.
Of course some businesses require that you have your own space. If your credit score is low, then you may look for alternatives that still allow for you to share space. Many businesses will allow you to either sublet space or simply share some of their office space for cash or other considerations. Perhaps they will let you use unused space if you provide some of your business’s output to them for free.
If your business requires inventory for sale, then you will certainly have more difficult decisions to make. Building an inventory normally requires good credit to allow you to receive merchandise for sale, as well as a time period to make the payments (assuming you were able to sell most of the inventory during that time).
Despite all of the difficulties, there are also ways for a business to establish its own credit history. The primary option is to obtain a DUNS number through Dunn & Bradstreet. It is free to obtain and it is sometimes requested by some venders (it is required for all federal government contracts).
A DUNS number only gives your business an identity. You have to pay to build a credit profile for the business. Essentially you are paying for an investigation of each credit reference that you claim the business has. Perhaps you paid rent at a previous business location. Dunn & Bradstreet would investigate that credit reference by contacting your previous landlord and confirming the positive rental experience. This includes the dates and the amounts.
It costs a bit of money to develop a D&B credit record, which by the way does not guarantee any future promise of credit for the business. It simply provides some credible record should you request additional credit on behalf of the business.
Ultimately you will need to improve your own credit rating if you want to be able to borrow money on behalf of the business. You need to ask yourself a simple question before applying: How confident are you that you will be able to earn substantially more than what you are having to pay for the debt?
If you cannot convince yourself, then you should probably look at ways of starting and building the business without having to go in debt. It might take a bit longer to reach higher productivity, but your bottom line might be much better without the burden of debt.
