How to rebuild credit after a business setback
Repay your debts, learn from your mistakes, get back in the credit game
Aja McClanahan had a go-big-or-go-home approach to starting her first business, a language translation agency.
“I went all out. I rented office space. Then I had to furnish that office,” McClanahan says of Comprehensive Global Services, in Elmhurst, Illinois. “I put it all on credit cards. I wanted to be official.”
After a year and a half, she closed the doors with $20,000 in credit card debt and a list of other financial entanglements to unwind.
McClanahan’s experience is all too common.
According to the Bureau of Labor Statistics, 20 percent of businesses fail in the first year and about 50 percent don’t last five years. Recovering financially
from a closed business can be overwhelming, and rebuilding credit can be
“If your business is failing, you probably have a lot of late payments. You may have a lot of debt that is outstanding,” says Brian Thompson, a certified financial planner at Brian Thompson Financial in Chicago.
Experts and business owners offer these tips for rebounding from – and rebuilding your credit after – a business setback:
Know your credit
Belinda Rosenblum, CPA and founder of OwnYourMoney.com, encourages her clients to pull a free credit report from AnnualCreditReport.com to verify whether business accounts are connected to personal credit histories.
I went all out. I rented office space. Then I had to furnish that office. I put it all on credit cards. I wanted to be official.
|— Aja McClanahan,
“Most times, business owners end up using their personal credit, particularly in the beginning,” she says. “Credit cards won’t grant you credit for a business if there is no credit history.”
Knowing whether your personal credit history is connected with your business accounts will help you decide how to approach settling the outstanding debts and work to rebuild your credit, she says.
Focus on paying your debts, and the IRS
Rebuilding your credit as a small-business owner is similar to how your build your personal credit. Pay your bills on time. Pay off debt to improve your credit utilization ratio. Clear up old, discharged debts lingering on your credit report.
Thompson, who is a former tax attorney, says filing tax returns and repaying any outstanding tax bills should be a priority for business owners forced to shut their doors. “The IRS, as a creditor, has more authority and avenues with which to collect their money,” he says.
If the business owner has commingled business and personal funds, the financial ramifications can be especially troublesome. The IRS is known to come after you personally for any outstanding business taxes, Thompson says.
Once the IRS files a tax lien, it will show up on your credit report, which can dramatically reduce your credit score.
Bankruptcy may not
wipe the slate clean
Often, the closing of a business is accompanied by a bankruptcy filing.
While a Chapter 7 filing provides an orderly process of liquidating a small business and settling qualifying outstanding debts, bankruptcy will not relieve you of any debts you have signed for personally.
Thompson notes that creditors may come after you for any debt not paid fully in bankruptcy, and those unpaid bills can be reported on your credit report.
Consult the advice of a bankruptcy attorney to determine if Chapter 7 is the best options in your personal situation.
Decide if your business credit is a keeper
A business can have a credit profile completely separate from the owner’s personal credit history, says Tai Steward, an accountant and CEO of Saida Financial Solutions in Houston. In this case, closing a business will not affect your personal credit hiistory as long as you have not personally guaranteed to cover any outstanding loans or credit cards.
Closing a business with a separate credit profile and starting over may be easier from a financial perspective, but the decision is not always clear-cut.
“Some places want to see that a business has been in existence for a while before extending credit,” Steward says. “If you’ve had a business for 20 years, it may be better to rebuild the business because it shows you already have longevity.”
Get back in the credit game
If your credit score is in the cellar after your business closed or a bankruptcy filing, Rosenbloom suggests a secured card as a way to start rebuilding your credit. You “secure” these cards with a deposit that's often equal to the credit line. Essentially, you're giving the lender your credit line in advance.
Most times business owners end up using their personal credit, particularly in the beginning.
|— Belinda Rosenblum,
CPA and founder of OwnYourMoney.com
Regularly check your credit score – many credit cards now offer free credit score trackers. After a year or so with a secured card, you likely can graduate to an unsecured card.
Learn from your
“It's only a truly epic fail if you don't learn anything,” Rosenbloom says.
“Not everything we do is going to work. The key is to pay attention, tweak along the way, and then be sure that we keep learning and growing.”
Start over, and don’t
be afraid to try again
McClanahan didn’t let a bad experience in business deter her for long.
Within a year of closing her first business, she opened the doors of her second venture, a database management consulting firm. She used the income from the second business to repay all of the outstanding credit card balances from her first business and to settle the charges incurred with the landlord after breaking the lease on her rented office space.
From her first to her current business, PrinciplesOfIncrease.com, she has learned plenty of lessons and has a new financial perspective. For one thing, she no longer finances her business with debt.
McClanahan’s advice: “Keep trying. As you hone your business acumen, you are bound to stumble onto something successful.”
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