Lee: There are more than 60,000 small businesses in Detroit (2012 U.S. Census). Small business owners often must use their personal credit and finances to start and bolster the business. If someone is looking to start a business, how should they save up?
Dickerson: There are 30.2 million small businesses in the U.S., employing 58.9 million people — 47.5 percent of the country’s workforce (SBA.gov). If you are making the switch to self-employment, you should set aside 6-12 months of living expenses to tide you over until you can generate reliable income and pay yourself.
We encourage individuals starting a business to utilize similar debt management advice that GreenPath provides individuals every day: Save money to fund a business. Adopt solid budgeting techniques. Focus on the essentials and slash discretionary spending. Eliminate debt using a debt management plan. Build up an emergency fund by automating savings (set it and forget it).
Lee: Does one’s personal debt and personal credit score affect their ability to start/grow the business?
Dickerson: Many people who call GreenPath counselors own small businesses and more often than not, their personal finances are entangled with their business finances. When things aren’t planned properly to start the business or there isn’t the time and attention paid to organizing their personal finances, their business ventures could be impacted. These are typical conversations we have with people daily.
Before applying for small business funding, check your personal credit score. It could impact the type and amount of loan for which you are approved. Lenders use your personal credit score as a reflection of your ability to manage funds and meet financial obligations. Blemishes on your personal credit will be taken into account. If you’re approved for a loan, you might receive less funding than you originally requested or may receive higher loan rates.
Property managers may review your personal credit when deciding to lease office space. Vendors may not extend credit for inventory or equipment based on one’s personal credit score. Many utility companies consider credit scores when qualifying an individual for electric, gas or water service at one’s home and one’s office.
Lee: Since March 2020, has GreenPath noticed an increase in entrepreneurs seeking financial relief/advice? If so, what’s been the most significant challenge?
Dickerson: Pre-pandemic, 58 percent of full-time gig workers would have had difficulty covering a $400 emergency. At the onset of the pandemic, nationwide, our HOPE Hotline (888-995-4673) saw a significant increase in calls from persons who had difficulty making mortgage payments and rent.
In May 2020, GreenPath accelerated its partnership with iPSE U.S.–the Association of Independent Workers to provide financial counseling and education, debt management and business support programs to help millions of independent workers, helping them navigate financial consequences of the pandemic. GreenPath’s certified counselors provide financial health assessments and one-on-one assistance in developing customized plans to reduce debt, establish emergency savings and improve credit.
Lee: And in Detroit, it is estimated there are more than 50,000 minority-owned businesses (2012 U.S. Census). Many of them were/are also hard-hit by the pandemic. What advice would you give MBE owners in terms of optimizing personal finances for small business success?
Dickerson: There are 1 million employer firms owned by minorities (Census.gov). The challenges for minority business enterprises (MBEs) in securing financing are well documented. Often capital for MBEs must come from their own savings or loans from friends and family. Many MBEs had difficulty securing Paycheck Protection Program (PPP) and other CARES Act funding. Black entrepreneurs more heavily rely on revolving credit lines and credit cards to finance their business.
In addition to shoring up personal finances, minority business owners should seek all available grants and low-interest loans from sources such as Grants.gov, Small Business Administration (SBA), Minority Business Development Agency (MBDA), the CDFI Fund, National Minority Supplier Development Council (NMSDC), Harlem Capital Partners and Humble Ventures.
Lee: Many small businesses were/are hard-hit by the COVID-19 pandemic. More than 120,000 Michigan companies received PPP loans. Now a second round of PPP is available as well as other state/local grant programs out there. Will someone’s personal finances affect their ability to get grants/loans?
Dickerson: Your credit score is not tied to your eligibility for PPP funding, but it is required for Economic Injury Disaster Loans (EIDL). EIDL doesn’t require a guarantor for loans up to $200,000 and instead offer these largely on credit score. The SBA will pull your credit prior to assess your credit report and determine your creditworthiness. Hard “pulls” can lower your credit score, usually temporarily.
Disqualifiers for PPP and EIDL loans include: judgments for defaulted federal debts, a repayment plan hasn’t been negotiated and you’re suspended by any Federal agency from participating; delinquencies 60+ days for child support; federal tax liens of more than $10,000; presently incarcerated, on probation or parole, subject to arraignment or an indictment or a felony on record within the last five years.
Lee: Explain the difference between the personal credit score and the business credit score. Does a financial institution look solely at the business credit score?
Dickerson: A personal credit score is built on your credit history. Scores range from 300 to 850. The higher it is, the less of a credit risk you are. The score is aggregated by three main bureaus – Equifax, Experian and TransUnion. It is calculated using the FICO model (payment history 35 percent; credit utilization ratio 30 percent; length of credit history 15 percent; new credit 10 percent; type of credit used 10 percent). It is required for both personal and business debt and credit applications.
A business credit score is built on activity attached to the business’ Employer Identification Number (EIN). It is aggregated by Dun & Bradstreet (Paydex scores range from 1 to 100), Experian Business (scores range from 0 to 100) and Equifax Small Business (scores range from 101 to 992). Each credit bureau calculates the business credit score in-house using criteria such as: credit and debt payments history; trade payments history; business size and age; business overall financials. It is only required for business debt and credit applications and a gateway to affordable financing.
Lee: If businesses were adversely affected by the pandemic and were forced to close, how does this affect your personal credit and finances?
Dickerson: In some cases a business bankruptcy could affect your personal credit score if you’re personally liable for the business debt. Your liability will depend on: the type of business entity used for your business; if you signed a personal guarantee for the business debt, and the company’s tax liability. If you’re a sole proprietor or partner, you’re personally liable for all business debt. To discharge liability, it could be an option to file a personal Chapter 7 or Chapter 13 filing for bankruptcy, which can significantly affect your credit for up to 10 years.
If you’re a limited partner or do business as a corporation or limited liability company (LLC), you aren’t legally responsible for business debts. The business entity (not the individual) can file for bankruptcy and this should not affect one’s personal credit.
Lee: What resources are available for small business owners? Is there a cost for your services? Website?
Dickerson: Those individuals looking to explore business ownership will find it useful to first understand their own individual financial picture. Everyone who calls GreenPath receives a free initial counseling session tailored to your individual household situation. Depending on the service, fees vary. Call 866-648-8122 or visit greenpath.com for tools and resources, such as an on-demand webinar on maximizing financing for your business.
Mark S. Lee is founder, president and CEO of The Lee Group and can be heard “In the Conference Room” at 11 a.m. Sundays on 910 AM. He also hosts the “Small Talk with Mark S. Lee” Facebook Live podcasts weekly. For more information, visit leegroupinnovation.com.