Living on credit cards during startup has risks, but with time you can recover a good credit score
Dear Your Business Credit,
I am a software engineer and a budding entrepreneur in Silicon Valley. Last year I started living on credit to build my startup as I quit my full-time job. It took longer than I expected, so I am taking my full-time position back again.
I have around 10 credit cards, and in the process, one got charged off. Others went into collections but I am bringing them all back up. The amount in collections is pretty small ($500). It just missed my mind as I was trying to do more than what I could process.
Moving forward, I am pretty sure I would be able to build a successful company, as I am in touch with venture capitalists and they are very interested.
Two questions: Does my personal credit affect my startup? In the near term I am expecting to sell my artificial intelligence engine in the $3 million to $5 million range. Given the liquidity flow, would I be able to get back to my previous credit score of 760-ish? – Susan
Many people talk about starting a business for years and never take action. Give yourself a pat on the back for committing to your idea and working hard to get it off the ground.Unfortunately, as you’ve discovered, the research and development phase of a business can be time consuming and costly. As you’ve discovered, living on credit cards during that phase is risky, because if the credit card bills come due before business revenue rolls in, you will not be able to pay them.
You can’t undo the damage to your credit overnight, but you’ve made a very smart move by getting a job in which you can pay your bills. Granted, it’s hard to work on a startup idea in the evenings or on weekends when you are already holding down a full-time job, but it beats living with the stress of unpaid bills.
Set aside some time to get on top of your finances now that you have a full-time job again. Your personal credit does affect your startup. Most lenders, such as credit card issuers and banks, base lending decision on a business owner’s personal credit, meaning you have to personally guarantee the debt. If your credit is poor, that will put you at a disadvantage if you need financing or a loan, meaning you will have to pay a higher interest rate than someone with excellent credit.
You should be able to rebuild your credit to the 760 range, but the only way to do that is to build a history of paying your bills on time. That will take a while, given that you have a debt that was charged off. Charge-offs remain on your credit report for seven years. (For more on the subject, read How charge-offs work, how they affect your credit).
Attracting several million in investment capital from venture capitalists should help your situation but it isn’t a quick fix for your credit problem. Here’s why: When venture capitalists invest in a startup, they are buying an ownership stake in the business. They will expect you to use the money they invest to grow the business, not pocket the windfall and use it for your personal expenses.
That said, many venture capitalists are prepared to pay the CEO of a startup a reasonable salary, so if you raise venture capital, make sure you negotiate one that is high enough for you to pay off your bills. You may even be able to negotiate for them to pay the credit card bills you racked up to get the business started.
Don’t wing it, though. Get help from a tough, well-connected Silicon Valley attorney who is experienced in negotiating equity deals. Venture capitalists, however charming, are very adept at negotiating contracts where they walk away with everything when the business is acquired or goes public – and the entrepreneur gets crumbs. A smart attorney will make sure you are rewarded for all of your hard work – so you don’t have to live on credit cards while launching your next startup.
See related: 5 steps to prepare your finances for a startup, Collectors have numerous ways to get money from entrepreneur, Minimizing score damage after a charge-off