Published December 20, 2012
Are you thinking about starting a new business in 2013? If you are, it’s worthwhile to get your personal finances in shape as one of your pre-startup action items. Here’s why it is important.
Before the recession hit hard, banks relied on a startup entrepreneur’s personal credit score plus pledged assets to guide their lending decisions, especially for the popular Small Business Administration 7(a) loan program. Then, an acceptable credit score was in the 600s. Today, entrepreneurs will need at least 700 to get a hearty hello from bank lenders.
Ambitious entrepreneurs, as well as their executive business partners who want to tap venture capital funds for business funding, should clean up bad personal credit ratings too. Investors are not at all forgiving to entrepreneurs who have a long history of poor money management. They reason, “If someone can’t handle their personal finances, how can he or she be trusted to manage thousands or millions of dollars to grow a profitable business?” It’s a fair concern.
Here are my recommendations to help prepare your personal financial standing for lender and investor scrutiny.
No. 1: Check personal credit reports for accuracy. Each year, individuals can receive copies of their credit report from three leading agencies through www.annualcreditreport.com. Alternatively, call 877-322-8228. Any errors on these credit reports can lower an individual’s personal credit score. It generally takes credit agencies 45 days to correct a report. If the agency fails to make corrections, file a complaint with the U.S. Federal Trade Commission, with a copy to the credit reporting agency. You do not have to sign up for costly credit monitoring services to obtain a free credit report or make corrections to your report.
No. 2: Check out local micro-loan programs. Here’s a little-known secret. Many micro-lending centers around the U.S. don’t rely on an entrepreneur’s personal credit score to receive a first business loan. That’s good news to startup entrepreneurs with poor credit histories. Even better, entrepreneurs who take out a micro-loan for as little as $500 and pay it back in a timely way can boost their personal credit score.
No. 3: Improve your credit score. There are several ways to improve a credit score over time. Success is all about making incremental steps to demonstrate a reliable pattern of payment and reduced debt obligations. Pay credit cards that are close to their credit limits first. Your credit score will increase to the extent you can lower your percentage of outstanding personal debt against your total available credit lines. Lastly, keep credit card lines in place. Unfortunately a closed credit card account can be perceived as a negative event, lowering a future entrepreneur’s personal credit score.
No. 4: Communicate with unpaid vendors. Pre-startup entrepreneurs who can’t pay a personal obligation or business obligation in full should call or visit the vendor to re-negotiate payment terms before the vendor sends the account to a credit-damaging collection agency.
Susan Schreter is a 20-year veteran of the venture finance community and entrepreneurship educator. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.