If you are starting a new business you will be wondering how poor credit affects the process of opening a commercial bank account. The good part is that it is easier nowadays to open a business bank account with low credit than it has been in the past.
Even though companies and their owners are financially classed as separate entities, banks will have to perform a credit check on business directors before opening an account or taking out any business loans. Bad credit can result from defaulted payments, bankruptcy, court judgments, or simply not building your credit. Depending on why your credit is low, your options will differ.
But first, let’s address why you would even want to open a business account in the first place.
Benefits of a Business Checking Account
Why open a business bank account? Strictly, speaking, you can run a business using your personal checking account so why open another one? The main reasons are organization and professionalism.
- Business records are organized. Separating your personal and business accounts let’s all of your business transactions be contained in one place and tracked on a single separate statement. Mixing personal and business transactions in the same account makes it harder to accurately gauge expenses and profit.
- You can accept credit cards. Customer pools are severely limited when you only accept cash payments, and many customers prefer to pay with credit cards. Business accounts have the option to accept credit card payments. You typically have to pay a small extra fee for this service
- Multiple account holders. You can have multiple signers on your business checking account so multiple people can use it.
- Professionalism. Opening a business account helps form relationships with banks and gives your business an air of professionalism. Banks prefer to work with professional looking businesses, so a business account will help on that front.
Understanding The Implications Of “Bad Credit”
If your credit score is low simply because you have insufficient credit, the first thing to do is check whether the bank you currently use has any business account options.
Even though you have insufficient credit, your bank should have all the necessary financial information about your accounts to make a judgment. They can see how you have managed your personal finances while with them. This option may not net you the best start-up package, but insufficient credit will likely cause your loan and account applications to be denied at new banks.
The positive side is that insufficient credit is not the same as “bad” credit; it simply means that banks do not have enough information to determine if you are a responsible borrower or not. Applying for new credit cards is one way to start building your credit, as is making payments on any loans you may have taken out.
The main problem is that rejections get recorded on your file and can further damage your credit.
If your record shows a history of being denied from banks, then other banks are more likely to follow suit and reject your applications, regardless if you have innocent reasons for having low credit. So the best first option is to check with your current bank as you have the highest chance of being accepted by them.
What to do when you have poor credit
If your primary bank will not issue an account to you, there are a few options you can take.
The first thing is to ensure the bank you try to open a business bank account with is covered by the FSCS. The FSCS covers your deposit for up to £85,000 and all regulated current account providers should be covered for this.
Form an LLC
If you are suffering from poor credit and cannot open a business account, forming an LLC may help. Forming an LLC or similar separate entity provides you with a tax identification number that uniquely identifies your business as a separate tax-paying individual.
You can then use this new business entity to open a business bank account. The benefit is that forming an LLC keeps your business credit separate from your personal credit, so you can start building your business credit.
Even if you have good credit, forming an LLC is a good idea because it will protect your personal credit from any hits to your business credit.
Check your credit reports
Surprisingly, many people apply for big-ticket financial items without checking their credit scores first. Your credit report flags any potential credit issues and gives you advice on how to alleviate those issues. Many websites and apps let you check your credit score for free and inquiries do not affect your credit. If you are going to apply for a business account with low credit, it is imperative you stay on top of your credit reports.
Try a credit union
You could also try opening an account at a credit union instead of the local bank. When you are new in the business world and your credit is not great, large banks are more likely to give you low loan amounts and make you pay higher fees.
Credit unions are typically smaller than large banks and offer lower amounts of money. For large businesses, this may be a problem but for small businesses, a credit union could be a good choice.
Credit unions are owned by the people who have accounts with them, so you will have to become a member first before you can open any accounts or take out any business loans. Credit unions are less likely to use credit reports and check verification systems, so you are more likely to get approved with lower credit.
Start a savings account first
Most banks will allow you to open a savings account even if you have poor credit. You can then use your savings account as a checking account and establish a positive account status. Then you can inquire about opening a business checking account with the bank.
Make a solid business plan
Normally, opening a business account involves meeting with a ‘business advisor’ who judges the ultimate status of your application. Having an airtight business plan is a good way to show theses advisors you mean business and can be trusted.
You don’t need to have your MBA to make a good business plan; the main thing is to have a solid financial forecast and list of projects that let the bank know the business’ potential.
Build rapport with banks
Contrary to public opinion, banks are not run by soulless robots but by flesh and blood humans who have emotions and empathy who do understand that poor credit does not necessarily mean you are irresponsible.
If you are shopping around for banks to open an account, try to build a relationship with a specific person who can help you out. Try to speak with a bank manager in person to explain your situation, or ask to open an account pending you keeping a certain balance. Building personal relationships with banks makes them more likely to listen to your situation and judge you based on your unique financial standing and person rather than an abstract credit score.
Fix your credit
If you are still having problems with your credit the only remaining step is to fix your credit. Unfortunately, there is a certain point after which fixing your credit is a better option than trying to open an account with low credit.
Debt consolidation can reduce unsecured debt in lower payments, which opens up cash flow for business owners to build their credit. If you are in a severe amount of debt, you will have to create a bare-bones budget to make the correct payments. You can also open new credit cards. As long as you don’t have a balance on that new card your credit immediately increases by opening a new card. A word of caution though — the goal here is not to get access to more money, but to fix your credit score.
The ratio of available to used credit also greatly affects your credit score. Paying off outstanding balances on cards with low limits and increasing the limits on any existing cards can help your credit score by increasing this ratio. As always, it is a good idea to pay off high-interest credit accounts first, even if they do not form the bulk of the debt. You can also dispute any charges of late-payment entries. If all else fails, ask nicely. You can get annual fees and charges removed by leveraging your loyal customer support.
If you have made credit mistakes in the past, it is not the end of the line for your business. It is entirely possible to still open a business account with less-than-desireable credit and find ways to improve your credit.