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Starting a business with poor personal credit: 3 tips to secure financing

You have a great business idea, but your credit score is holding you back? Securing financing may be harder, although not impossible. Here are three tips to help you finance your business despite these obstacles.

Read time: 3 minutes

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For many entrepreneurs, personal and business finances are intimately tied up. For someone with a bad credit score, this can make accessing a business loan more difficult than it would be otherwise.

This situation is much more common than you might think. Valérie Bornais, Manager at BDC’s Entrepreneurship Centre in Quebec City, regularly meets entrepreneurs who don’t have a perfect credit history. “Many people are not aware that their consumption habits can affect their credit score,” she explains. “And they don’t realize that this can hamper their business either. In fact, they should know that financing is often granted based on personal credit history.”

This doesn’t mean you have to give up your dream of launching a business if you have a bad credit score. It all depends on what got you into your current financial situation. “If it’s the result of an unfortunate event, such as a divorce, but the business idea is sound, people are generally more willing to take a risk and help you out,” says Ms. Bornais. “You will still have to demonstrate that you have a good business plan, a good product and that you are a good manager.”

Here are a few solutions that will allow you to move ahead with your business project without too much delay.

1. Rectify your financial situation

First of all, it is important to get your credit history from Equifax or TransUnion, the two main credit rating agencies in Canada. This will help you find out your score and establish that the information in your file is accurate. If there are mistakes, you can contact these agencies to have it corrected.

There are various strategies you can use to improve your financial situation. First and foremost, it is essential to pay your bills on time—just one 30-day late payment can have a significant impact on your credit score. Paying off the full balance of your credit card each month, using your credit limit wisely—no more than 30%—and keeping the number of loan requests you make to a minimum are all winning tactics when it comes to rehabilitating your credit history.

According to Ms. Bornais, you can help your cause by teaming up with one or more associates whose credit history is impeccable. A more qualified and financially sound management team may tip the scale in your favour.

In such a situation, it is important to have a lawyer draft an agreement determining everyone’s roles and responsibilities when the stake is acquired in order to protect all parties.

3. Find a guarantor

A friend or family member may act as a guarantor on a loan. This person must meet the lender’s eligibility criteria.

The lender’s decision will be based on the guarantor’s personal assets and credit history. The friend or relative must also be aware of the commitment they are making, since being a cosignatory on the loan will appear in their credit history and may limit their borrowing power. They must also be clear on the extent of their liability should you be unable to meet your obligations.

Avoid damage by being proactive

No start-up can get off the ground without some personal investment. But don’t wait until you’ve used up all your savings before you visit your banker. Once your credit history has been affected, it will be much more difficult to improve your rating.

It is important to structure your business initiative well from the outset. Incorporation will enable you to protect and separate your business’s credit from your personal credit.

“You must also plan your project ahead of time,” Ms. Bornais adds. “Using your line of credit to finance your start-up may be justified, but you must have a game plan in place to repay the interest. And you should also think about other sources of start-up financing. This will show that you’ve done your homework and will increase your credibility with lenders.”


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