You may be surprised to learn that your personal credit score can have an impact on your ability to start a new venture. A bad credit history can have an impact on your dealing with financial institutions. Even if you are not seeking funding from a bank or other traditional financial institutions, the institutions use your credit history as a basis for other decisions. The ability of your company to receive items such as credit cards can be impacted by the founder’s credit score. If the founder has a poor credit history, many banks will not want to take the risk of issuing your venture a corporate card.
Nearly as distressing as bad credit is no credit at all. Bear in mind that as a start-up with no operational history, that also means no credit history. In dealing with every day vendors, or when attempting to buy everyday supplies, this lack of credit history can have a significant impact. For example, if you are trying to lease a corporate vehicle (a delivery truck), don’t expect to take advantage of the financing charges offered via promotions. Instead, your lack of credit history will mean that the leasing company feels it is taking a risk by dealing with your firm. That advertised lease rate of $149 per month can quickly escalate and you could easily end up paying double or triple that amount.
One way to combat a lack of credit history is to slowly build a credit history for your company, whereby you show relevant parties that you can pay your bills on time. Obviously, the drawback to this is that it takes time to establish an effective credit history. Another method is for a founder/partner involved in the venture to offer a personal guarantee. While this may help to establish some credit with relevant parties, its incredibly important that the person offering the guarantee is aware of the risks they are incurring.
Avoid This: Try to avoid personal guarantees if at all possible. While they can help to minimize the “cost” of credit to your venture, they can impose a significant risk to the individual handling the guarantee.