A Publication of WTVP

Keeping a keen eye on your credit record can save thousands of dollars… and potential strife in running your business.

A greater understanding of the “secret matrix” behind your credit score has never been more important than in today’s economic environment. It’s probably obvious to you that if you don’t pay your bills on time or a past debt goes to collection, those actions impact your credit score in a negative way. With those unfortunate aspects part of your credit record, it’s likely that you will not qualify for the best rate on a mortgage loan, credit card or auto loan, which will cost you thousands more in interest. But what you may not be aware of is that these days, your credit score could negatively affect several more factors, including your next job opportunity; your auto, home or liability insurance rates; and even your potential security clearance. And these repercussions affect many more people than you might realize.

If you happen to be a business owner, you are already aware of the impact your personal credit can have on successfully obtaining a business line of credit, small business loan or the ability to lease office equipment. A longtime business owner with a track record will have had the time to build up business credit, so the impact of his or her personal credit score is minimized. However, in these economic times, there are many who’ve become self-employed for the very first time in their careers. For these individuals, a personal credit score can be the most important factor in creating a path to business success. New small business owners should be aware that a strong personal credit score, together with a strong business plan, is a one-two punch in obtaining a new line of credit from a bank.

So, what can business owners do to make sure their personal credit record is an asset to help them successfully get access to operating capital and equipment to run an effective business? Let’s peek behind the curtain and learn the secrets of the matrix of a great credit score:

Next Steps
Managing your personal credit rating responsibly, and doing so long before starting a business, is an immediate necessity. More often than not, a lender will look at the personal credit of the principals of the new business. The philosophy behind this is simple: if those who are running the business have good credit, they will generally be more responsible when it comes to managing the debt of their business. You should also be prepared for lenders who typically require new business owners to personally guarantee the loans for which they apply. When someone signs as a personal guarantor, he or she is backing the loan with personal assets. If the business defaults on the loan, then the personal guarantor is legally responsible for the debt.

Having the necessary elements in place ahead of time can help a business owner qualify for financing at reasonable rates without putting up excessive collateral. You almost have to put yourself in the mindset of the lender and ask, “Would I lend my own money to these individuals, and am I comfortable with the ability they have shown in the past to repay their debt?”

Corporate Veil of Protection
Business owners, without incorporating as a Sub-S corporation, LLC, trust or nonprofit, typically use their personal social security number as a tax ID number, which can significantly complicate a personal credit score. If you can afford it, and your tax advisor recommends it, your personal credit accounts should be kept separate from your business accounts, and you may wish to contact an attorney about incorporating your business and gaining a separate tax ID number. iBi

George DeMare III is managing partner of Midwest Mortgage Capital.