By Karen E. Klein Q: I want to start a small business. I have saved $15,000 in seed money, have a finance degree from a reputable business school in New York City, experience in the industry, and a watertight business plan. However, my credit history is not the best: I've never been in bankruptcy, although I am not currently in default. How difficult is it going to be to get a small-business loan -- say $150,000?
-- S.G., New York, N.Y.
A: It's not uncommon for would-be entrepreneurs to have poor personal credit histories, especially with American consumers' reliance on credit cards. The rub here is that lenders definitely look for a good credit score when they evaluate loan applications, so you may need to rely on other sources of funding or wait a while and do some fix-it work on your credit.
"Under the $1 million threshold, business loans are based on the personal assets and credit history of the entrepreneur, not on the merit of the business or the idea," says Doug Tatum, CEO of Atlanta-based Tatum CFO Partners. "The reality is that it's too expensive to do the work necessary to make a decision on the merits of a very small business or a startup. So they have to rely on the individual's net worth and credit reports." Not until a business gets to the $10 million level does it typically warrant lenders' scrutiny and due diligence on its own merit, Tatum says.
This is why startups most often get seed money from personal assets, loans backed by collateral -- usually real property -- or friends and family. Not until the business starts growing and the need for capital exceeds the individual's assets do lenders shift their mindset from financing an entrepreneur to financing a business, Tatum says. Unfortunately, there's usually a gap between business startup and the point when a company gets large enough to be taken seriously.
REPAIR YOUR CREDIT. When a would-be entrepreneur starts out with something like a bankruptcy or tainted credit report, it makes it even tougher to ramp up. Your best bet, if you can't get funding from people you know and you don't have the personal assets to get a loan, may be to work on establishing good credit while you continue saving, experts say.
"There are real people out there who can help" repair your negative credit rating, says Adrienne Musson, a Los Angeles financial consultant. "Consumer credit counselors will help get creditors to stop calling, or you can renegotiate bills on your own," she says. "There are also credit-repair companies that can help with mangled credit and companies that will work with people who have problems with credit. The key is to solve the problem that caused the bad credit in the first place."
Make sure that you check out any credit-repair company thoroughly before paying it or signing a contract. Credit-repair frauds prey on people desperate to clean up their credit history, according to the Better Business
. "There are scams out there, and companies that focus on hiding public records so deadbeats can go out and screw more lenders," Musson says. "What you want is help that focuses on teaching the appropriate use of credit cards, budgeting, rebuilding credit, and how to reestablish a good [credit] score." Look for nonprofit credit counselors, such as American Consumer Credit Counseling online or in your Yellow Pages. You can also ask for referrals to legitimate local debt counselors from your Better Business Bureau.
Putting your plans on hold may be tough, but try to look at it this way: Taking the additional time to learn how to manage your own finances prudently will not only give you more business financial savvy but it will also give you more time to research your industry and save additional funds -- so when you do go out to get that loan, your debt will be smaller right off the bat. Good luck. Have a question about running your business? Ask our small-business experts. Send us an e-mail at firstname.lastname@example.org, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.