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Start Your Business Startup Basics

Opening a Business Account When You Have Bad Credit

Opening a Business Account When You Have Bad Credit
Opening a business bank account can be tricky with bad credit. / Credit: Bank vault image via Shutterstock

Are you an aspiring small business owner with less than perfect credit? If you're launching a new business and need to open a bank account, you may wonder how a poor credit score will affect the process.

Here are five things you need to know before you try to open a business account when you have bad credit. 

They'll check your credit

Banks doing their due diligence can confirm your previous banking and credit histories in several ways.

"Opening a small business account is really no different than opening up a regular checking account," said Tevis Verrett, president of the financial education firm The Note Empire. However, if you've had banking and credit problems with another bank, you may have to address those issues before opening a new bank account.

"The banking institution will probably be subscribed to ChexSystems," said Verrett. And if account seekers "have run afoul of another bank, they will be unable to open any account until they get their ChexSystems rating cleared up." For more information on how to get started on clearing up your ChexSystems rating, visit the company's website.

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Your personal credit matters

While you may choose to open a business bank account as a sole proprietor, if you've had personal credit issues, this may not be a wise decision.

"You can open a bank account as a sole proprietor, but this bank account will be tied to your personal financial status," saidTiffany Wright, president of The Resourceful CEO, a financing advisory firm for small to medium-sized businesses.

This means if you have judgments or liens against you personally, your business bank account can be seized, Wright said. "I know most small businesses operate as sole   proprietorships, but this is another good reason to form a separate legal entity for your business," she said. 

And your credit score does, too

If you have poor personal credit and you do attempt to open a business account as a sole proprietor, you may not get very far.

"The biggest risk is that the bank may check your credit score before opening the account, and if the bank deems the score too low, [it] may not allow you to open the account," explained Wright. Wright said a poor credit score could also limit other business banking activities.

"You may not qualify for some of the credit-based services such as account overdraft protection, an overdraft line of credit or business credit cards," she said.

Though it's fairly easy to open a basic business bank account with weak credit, applying for commercial credit lines based on a poor personal credit history is difficult, said Verrett.  

As he has learned when helping businesses get financing, a variety of personal credit factors may come into play when approving commercial credit lines. These include credit score, credit activity history and credit card usage, Verrett said."It is based upon a minimum 720 FICO [score], 10 years seasoning of the credit history and 20 percent on credit card utilization."

Try forming a relationship

Wondering how you can establish a solid business relationship with your bank when your credit is a little tarnished? Signorelli advised working with a particular person.

"Make sure you have one person that you deal with," said Signorelli. Having one contact is important to keep things running smoothly when potential cash-flow problems arise.

"Personal bankers will assist with these types of issues that can snowball," Signorelli said. "It's easier to communicate with one person who knows you than to run to the bank in a panic if you think a check is going to bounce.”

Forming an LLC might help

Wright has one simple tip for aspiring small business owners with bad credit.

"If you have a poor personal credit score, form an LLC, corporation or similar separate legal entity," she said, adding that it's important to get a tax identification number to identify your business as a tax-paying entity separate from you as an individual. The next step? Use the new business entity to open a bank account.

"The business bank account is the first step in building credit for your business separate from yourself," said Wright. "Even if you have great credit, you will protect your personal credit by keeping your business credit inquiries off of your personal credit report."

Consider a credit union

Instead of heading straight to the neighborhood branch of a big bank, search out a local credit union instead. The personalized service and attention to individual business situations can make life a little easier in the early days of your business.

"When you are new, and especially if your credit is not stellar, larger banks are more likely to hold deposits and make you pay higher fees," said Holly Signorelli CPA, a financial expert and small business owner. This is bad news for cash-strapped new businesses struggling to get started. "Holding deposits on a small business, even for just two days, can cause major cash-flow problems," she said. Signorelli noted that some of the bigger banks will hold deposits up to 10 days.

Before your bank appointment, ask whether a personal credit check is required to open the account, as some credit unions do this as part of the process of opening a business account.

Editor’s Note: Considering a business cash advance for your business? If you’re looking for information to help you choose the one that’s right for you, use the questionnaire below to have our sister site, BuyerZone, provide you with information from a variety of vendors for free:

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Originally published on Business News Daily.