Personal vs. Business Credit

We all love to hear about entrepreneurial filmmakers who hit the big time on a low budget movie funded entirely by credit cards.  It’s so American.  It turns out it’s a bit Russian, too.  A quick Internet search will reveal that, ahem, Sergey Brin and Larry Page started Google with their credit cards.  So, if it’s good for those guys, is it good for you?  Perhaps in your startup, but not as a permanent capital source.

My hope is that your entrepreneurial spasm (see E-Myth Revisited by Michael E. Gerber) included a business plan.  The key to using your personal cards is to make sure you are paying them on time and paying more than your minimums.  How much more?  Even if it is only a dollar more, that will count toward your good credit and help to set the stage for the transition to a business line of credit.

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Many of the articles on this website talk about the importance of “knowing your banker”. I want to underline that because it really is a key element to getting access to capital. Your credit history is one of the important factors in a decision to loan or not to loan.

A banker’s belief in you – and in your business – is equally important. Long before you intend to transition from personal to business credit you should be seeking the counsel and collaboration of the branch manager at your local bank. You will be quite surprised to see how willing and available they are for that purpose.

In my practice, many people come to me when they have made a mistake with their personal credit and have ruined their credit score. They have concern that a poor credit rating on the personal side will negatively affect their ability to get access to capital for their business. If you have been using personal credit through the economic downturn and your finances presented some challenges that damaged your credit here are some suggestions on how to improve your credit standing.

  1. Take action: the biggest challenge that most borrowers have when they get into credit card trouble is fearing the wrath of the collector.  Your proactive call to your creditor will convert even the craziest collector into a collaborative partner in resolving your problem.
  2. Be honest: the second biggest challenge that most borrowers have when they get into trouble is being honest about where they stand. They believe that being “smart” will bring them the best possible resolution. It has been my experience thattransparent honesty typically is your most powerful tool in achieving a positive resolution.
  3. Request help: the last thing that most borrowers in trouble will do is to ask the collector for help. It is very counterintuitive to ask a bill collector for a solution. If you are delinquent, or even if your debt has been charged off, your collector has the authority to solve your problem – if you know how to ask. They also have the authority to help you with rehabilitating your credit with “goodwill” deletions. Simply, once you have worked with the collector to resolve the debt they can remove the bad marks from your credit report. “Please” and “thank you” go a very long way to achieving this outcome.

Resources:

www.AnnualCreditReport.com is the free (for real) site that is mandated by law to provide consumers free access to their credit history.  The Federal Trade Commission recently issued a report stating that nearly 90% of credit histories contain errors. It is in your best interest to look carefully every year at your credit report to make sure that their mistake does not keep you from getting your loan.

Harvey Warren is author of Drop Debt, Surviving Credit Card Hell Without Bankruptcy.  A leading voice in consumer debt relief, Mr. Warren frequently appears in the media, including an ongoing role as the Financial Guide for the Home and Family Show on the Hallmark Channel.

Learn more at www.HarveyWarren.com.

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