The following is a guest post from Ed O’Brien from CreditRepair.org.
Many people begin the formulating the idea of starting a small business as a way to supplement full-time income or as a means for resolving their employment issues. With a tough job market, many are turning to their own innate skills to try and make a profit. However, if you have been personally struggling to make ends meet and have in the past let a few bills go late or unpaid, you may be doing a disservice to your future new business.
What Lenders Want
The majority of small businesses need financial bootstrapping from the proprietor and depending on the type of operation you are looking to establish, that sum of money needed for startup may be more than you have in your pocket. Some business ideas will require a hefty bankroll to open the doors and even if there are many operational ideas that require less overhead, there will still be expense involved if only for promoting your new business to its target audience.
Most entrepreneurs will need to turn to other resources to secure the cash they need. Friends and family can only do so much to aid a self-financing effort so entrepreneurs will then need to go elsewhere for the rest. That Ã«elsewhereÃ is typically a bank, credit union, or other financial institution. Investors may also play a part in the financial plan of a start up but that avenue can be more complicated than getting a loan from a bank.
Lenders have much tighter lending requirements than they did in the past. Because the business has not established its own credit foundation, the burden of proof lies with the business proprietor, meaning the business idea holder needs to have an impeccable credit record if they wish to get approved for a small business loan at a good interest rate.
Your Burden of Proof
If you have bad credit, lenders may be hard-pressed to even approve a loan for your business. In addition to a great personal credit history, you must also have a solid business plan to back up your ideas. A bank does not want to lend thousands to someone with a history of not paying bills on time nor do they want to lend money to support a business idea that may or may not succeed.
You must come to the loan table with a credit score that gives the lender confidence. Ideally, a credit score of 730 or higher is what lenders are looking for in applicants. Lower scores may still be approved by some lenders but you should expect to pay a few thousand dollars over the life of the loan because of a higher interest rate.
Lenders willing to give you a loan still want to cover their bases and create loan terms that pay them back more just in case something goes wrong. The thousands of dollars extra you need to pay in interest and fees for having a less-than-perfect credit score would likely have been better allocated as an investment back into your businessÃs future.
As you piece together your business plan, take a good look at your own credit history and current score. If things are not as strong as they could be, it would be in the best interest of your business to work on improving credit scores and fully mapping out a solid business plan long before approaching a bank. There are many other things you can do in the meantime to get ready to launch your new venture. Rushing can be detrimental to your loan possibilities and bad credit could be disastrous to your business idea.
Begin paying all of your personal bills on time each and every month. The effort will pay off when your credit score goes up. Additionally it is also beneficial to budget out a plan so you eliminate as many personal debts as you can on an efficient timeline. This may mean you need to wait additional periods of time before launching your new venture but the wait will be worth it for both your own personal credit history and the birth of your businessÃs credit foundation.