Having a bad credit history and poor credit score can feel like a heavy burden to carry, especially for a small business owner. While good credit can certainly come in handy when it comes to business loans and business credit cards, bad credit is not necessarily a financial death sentence.
The truth is that only 1.8% of Americans have perfect credit. You don’t have to be in the 1%, but financial institutions will look at your history when you apply for a business credit card, and bad personal credit might have a negative effect on your eligibility. This is especially important for new business owners who have not yet begun to build business credit.
The good news is that if you have bad personal credit there are ways to improve your credit score so that no one, not even yourself, will stand in the way of your business’s future success.
What is Personal Credit and Business Credit?
The purpose of credit, both personal and business, is to give an indication of how well you manage your finances. However, the equation for calculating each type of credit is slightly different.
Personal credit scores are based on five main factors:
35% of the score is history of payments: Do you make payments on time? Do you have any outstanding bills to pay? Do you have a history of making late payments? The more on time payments you have in your history, the higher the credit score.
30% of the score is how much you owe: How much money do you owe on loans and credit cards? How much do you owe compared to the amount of credit you have? Scores will be lower if you owe more than you can pay for.
15% of the score is the length of your credit history: If you have very recently opened your credit cards, there will be no credit history to evaluate. This can hurt your score, as scorers want to be able to evaluate your patterns over a longer time period.
10% of the score is the types of accounts you have: If you already have multiple types of accounts, like home loans, personal credit cards, and they are all in good standing, it shows an ability to handle your finances in a responsible way.
The final 10% of the score is recent activity: If there is anything out of the ordinary in your recent credit activity, like taking out multiple loans or opening many new credit cards, this will be considered a red flag and can lower your score significantly.
Business credit, on the other hand, is calculated differently depending on the credit bureaus, but will generally include the following:
History of payments to creditors and vendors.
Age of your company and age of your company accounts.
The size of your company.
How you have used your past credit.
Risk of success in the industry.
Business credit bureaus, such as Equifax, Experian, and Dun & Bradstreet, play a crucial role in evaluating business credit. They influence financial decisions by lenders and are significant in obtaining a DUNS number for federal grants and loans.
The exact scale for scoring will also vary from one credit bureau to another, but overall a higher score is always better than a lower score. Your business credit profile will include your credit score along with other relevant information about your financial history.
Are Business and Personal Credit Related?
It is important to note that while personal credit and business credit are not directly linked, they are not completely separate either. While each one measures slightly different things, as a business owner, your personal credit can be an indicator of how you handle finances overall. This is especially true if you are the sole owner of your business.
Separating personal and business finances by opening a business bank account is crucial for better financial management. This practice not only protects individuals from personal liability tied to business expenses but also helps maintain distinct financial records for personal and business transactions.
Bad personal credit can also have an impact on financial business decisions, specifically for new businesses that have limited credit history. Credit bureaus and lenders will often review personal credit before business credit, and if your personal credit is bad this may be enough for them to not want to work with your business at all.
How to Improve Your Credit Score
If you have a bad personal credit score there are ways to improve it. It will take some time but by doing the following, your credit score will eventually get better.
Pay all your credit card bills on time. If you can, pay them early.
Pay off all maxed out cards, and keep them that way. We understand that this step might take a while, but it is possible.
If you don’t have a credit card, take one out so you can start building a credit history. There are plenty of credit cards for people with bad credit available.
Use a personal credit card responsibly to improve your credit score over time.
To sum up, improving your personal credit is simple, but will take time. All you have to do is pay your bills on time, don’t spend more than you have, and be patient.
How to Take out a Business Credit Card Even With Bad Credit
It is a good idea to take out a business credit card, even if you are the only owner of your business. This way your business and personal spending will be separate, which makes doing things like accounting and taxes much easier. Taking out a business credit card will also help you to begin building business credit.
If you are concerned about your bad personal credit preventing you from being able to take out a business credit card, don’t worry. There are business credit cards specifically for people with bad personal credit.
There are many business credit card options, including secured business credit cards, so it takes time to do research about what kind of card is right for your business. But remember, as the owner of your business, your personal credit is on the line even when it comes to business credit cards and loans, specifically when it comes to personal guarantees. Managing business expenses using dedicated business credit cards can also help protect you from personal liability.
If you have time to spare, we suggest building up your personal credit score before taking out a business credit card. If you can’t wait, there are options for people with bad personal credit. As time goes on and your credit gets better, you will be able to apply for better credit cards for your business. Credit limits can vary based on the type of business credit card you choose, so it’s important to monitor them as part of managing your business finances.
Small business credit cards play a crucial role in helping small business owners build business credit, making it easier to access loans in the future.
How to Apply for a Business Credit Card with Bad Personal Credit
Applying for a business credit card with bad personal credit can be challenging, but with the right approach, it’s entirely possible. Here’s a step-by-step guide to help you through the process:
1. Assess Your Credit Situation
Start by obtaining a copy of your personal credit report and checking your credit score. This will give you an understanding of where you stand and help you identify any areas that might need improvement. Look for any errors on your credit report and address them before applying.
2. Research Business Credit Card Options
Look for business credit cards designed for individuals with less-than-perfect credit. These are often labeled as secured business credit cards or cards for those with fair credit. Compare different options based on fees, interest rates, rewards, and credit limits to find one that fits your needs.
3. Consider Secured Credit Cards
If you have trouble finding an unsecured business credit card, consider applying for a secured business credit card. Secured cards require a cash deposit that serves as collateral and can help build or rebuild your credit. This deposit is typically refundable if you close your account in good standing.
4. Prepare Your Application
Gather necessary documents and information, including your business’s legal name, tax identification number (EIN), financial statements, and details about your business’s income and expenses. Be prepared to explain your business’s financial situation and why you are applying for the card.
5. Apply for the Card
Complete the application form either online or by mail. Be honest about your personal credit situation and provide accurate information about your business. Many issuers will consider other factors, such as your business’s revenue and overall financial health.
6. Use the Card Responsibly
Once approved, use your business credit card wisely. Make timely payments and keep your balance low relative to your credit limit. Responsible use will help improve both your business and personal credit scores over time.
7. Monitor Your Credit and Adjust as Needed
Regularly check your credit report to track your progress. As your credit improves, you may qualify for better business credit card offers with higher limits and more benefits.
By following these steps, you can secure a business credit card even with bad personal credit and begin to build a stronger financial foundation for your business.
