Opening a Business Account When You Have Bad Credit

How does your credit affect opening a business bank account?

Many personal credit factors come into play when banks evaluate an entrepreneur or business owner for a business bank account. Banks want to work with companies that manage business finances well, so before allowing a business to open an account, they’ll evaluate the business owner’s credit and banking history using the following resources: 

• Credit reports: According to Tevis Verrett of Triumvirate Advisors, banks look for specific credit report criteria when deciding whether to work with a business. “[Approval] is based on a minimum 720 FICO [score], 10 years’ seasoning of the credit history and 20 percent on credit card utilization,” Verrett explained. Your personal credit history matters because late or missing payments indicate that your business may not be able to cover overdrafts and meet all obligations.
• ChexSystems scores: Financial institutions also use a service called ChexSystems, which provides information about how consumers manage checking and bank accounts. The agency evaluates all current and past accounts and looks for overdrafts, unpaid bank fees, and bounced or fraudulently written checks. It assigns consumers a score based on these activities. Scores range from 100 to 899. The higher your score, the less risky you appear to banks. 

What happens when a bank considers you for a business bank account? 

When a bank considers you for a business account, it takes the following underwriting steps:

1. The bank checks your business credit.

If you have an established business, the bank will check your business’s credit score. If you’re just starting a business, you may not have established business credit yet. However, if you have a poor business credit score or ChexSystems rating, banks may be reluctant to work with you.

“The banking institution will probably be subscribed to ChexSystems,” Verrett noted. 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.”

2. The bank evaluates your personal credit.

If you apply to open a business bank account as a sole proprietor, the bank will check your personal credit history to see if you qualify. If you have another business legal structure, such as a limited liability company (LLC), your personal finances are a step away from your business finances. However, the bank generally still checks your personal credit unless the LLC has a proven track record and a good business credit score.

If you have poor personal credit and attempt to open a business account as a sole proprietor, you may not get 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,” said Tiffany Wright, president of The Resourceful CEO, a financing advisory firm for small to midsize businesses.

3. The bank approves or denies your business account.

The bank will deny or approve your business bank account. However, even if you successfully open an account with a lower credit score, the bank could still limit other business banking activities, such as a business credit card, overdraft protection, or lines of credit. 

How can you get a business bank account with bad credit?

Although a low credit score may hurt your ability to get a business bank account, you can take several steps to increase your approval odds. 

1. Form a relationship with a bank.

If you already have accounts at a specific bank or credit union, that financial institution is more likely to approve your business bank account. You may be able to open an account almost instantly at a financial institution where you are already in good standing.

If you want a business bank account at a new financial institution, work to establish a solid business relationship with the bank. Holly Signorelli, a financial expert and owner of Holly Signorelli CPA, said businesses should form a relationship with a specific banking representative. 

“Make sure you have one person that you deal with,” Signorelli advised. “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.”

2. Clean up your ChexSystems report and credit history.

First, request your free ChexSystems report, which you’re entitled to annually. If you’ve been turned down for a bank account, you can find out why your application was rejected and then identify areas that need improvement.

Read your ChexSystems report to see if it contains errors. If you find an error, dispute it with ChexSystems. This process can take up to 30 days, but it could result in the item being removed and an improvement in your score.

You should also check your credit history. You may be able to see an estimated credit score through your bank or credit card company. Still, it’s essential to see all of the details about your credit history, including reported late payments and high debt balances. 

Be sure to clear outstanding bank fees or debts that are hurting your ChexSystems or credit reports. These actions will boost your scores. Once you resolve outstanding debts, ask the financial institutions that reported you to update their reports, as this will speed up the process.

3. Consider forming an LLC.

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. 

Getting a tax identification number is also crucial. This number identifies your business as a tax-paying entity that’s separate from you as an individual. Your new business entity may have a better chance of being approved for a business bank account.

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

While you may want to open a business bank account as a sole proprietor, be careful if you have credit issues, because the account will be tied to your personal financial status. And if you have judgments or liens against you personally, your business bank account can be seized.

“I know most small businesses operate as sole proprietorships, but this is another good reason to form a separate legal entity for your business,” Wright said.

4. Consider a credit union.

Instead of applying for an account at a big bank, check out your local credit union. A credit union’s personalized service and attention to individual business situations can make life a little easier for your business. Although some credit unions perform a personal credit check before allowing you to open a business account, you may have a better chance of approval. 

Additionally, credit unions are less likely to impose account restrictions. In contrast, even if a traditional bank approves your account, you may face limitations and caveats. “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,” Signorelli said. 

These limitations are bad news for cash-strapped new businesses. “Holding deposits on a small business, even for just two days, can cause major cash-flow problems,” Signorelli noted. Some big banks hold deposits for up to 10 days.

Credit unions are more likely to approve you and less likely to impose cash-flow-killing restrictions. 

5. Apply with a bank that doesn’t use ChexSystems.

Some banks don’t run a ChexSystems report when considering you for a business checking account. Additionally, some local banks may not consult with ChexSystems, thus improving your approval odds.

Persistence pays off when you’re applying for a business account

As a small business owner, you know the importance of persistence. You’ve undoubtedly overcome many hurdles to come as far as you have. If you take steps to improve your credit and financial histories and keep trying, you should ultimately be successful in finding a financial institution that accepts your business and meets your banking needs. 

Donna Fuscaldo contributed to this article. Source interviews were conducted for a previous version of this article.