Poor personal credit hurts business card application

Your Business Credit columnist Elaine Pofeldt
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.

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Question Dear Your Business Credit,
Can I apply for any business credit card without giving my personal information? My business credit is excellent but personal credit is too bad. My business is an LLC. – Mohammed

Answer Dear Mohammed,
Congratulations on building excellent business credit. I am assuming that you mean you have built good trade credit from other merchants, since that’s one of the main ways to build credit for your business that doesn’t rely so heavily on your personal credit record. Although your personal credit is poor, the fact that you have been able to succeed in building good business credit portends well for the future. It tells me that you know how to handle credit.

You probably can’t apply for a business credit card without giving your personal information, and if you apply with poor personal credit your chances of approval are low. Here’s why: Creditors generally view small businesses and their owners as being one and the same. Usually you will have to give a personal guarantee to get business credit or at least share liability for the debt with your business in what is called joint and several liability. Ultimately, creditors want to know that the owner will make good on any business debts the business can’t pay.

So what can you do to get the credit you need? You may not want to hear this advice – because it is going to take patience to follow it – but the best method is to work on rebuilding your personal credit over the next six to 12 months.

Look at what you did differently when using business credit than when using your personal credit. The strategies that helped you build good business credit should work just as well in improving your personal credit.  

Often what trips up business owners is that they max out their personal cards to fund a new business or to smooth over cash flow shortages. A high credit utilization ratio will lower your credit score.

Let’s assume you’ve maxed out your cards, too. Doing all you can to pay down high balances on your personal cards — and to pay at least the minimum payment every month on time — will help you improve your personal credit. This may require you to bring in more revenue. You may be able to rustle up more cash than you think by paying more attention to invoicing customers and collecting from them. This reduces the amount they have to borrow and prevents the cash-flow crises that lead to over-dependence on credit cards.

Looking for ways to shrink your overhead is also important. For many businesses, the quickest way to do this is to move from brick-and-mortar workspace to a “virtual” one, such as a home office or a co-working. The changes you make don’t have to be permanent.

I would try to limit any additional borrowing for your business until you start improving your personal credit. The fact that your personal credit is damaged means you are financially vulnerable. Adding more debt to your situation — even if it is at your business — will make it worse and could put you in financial trouble if the economy hits a bump.

Many successful businesses finance their growth out of cash flow. I’d suggest you try to do that now. Slowing down your growth until you can get all of your finances in order will free you from distracting worries about your personal credit — so you can give your best effort to your business. Good luck!

See related: Financing your business without relying on personal credit

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Updated: 02-21-2019