First thing's first - what's in your wallet?

For a couple of years, I was responsible for counseling current and potential business owners on pursuing bank loans. The largest hurdle for many of them was not the business plan... it was personal finances. Many people came in with solid plans, great business ideas, but no way to acquire financing because of these top three issues:

1. They had no savings - a usual requirement of obtaining a bank loan or even an investment is that you have put money into the deal yourself (at least 20% of what you need).

2. Bad credit - since you are asking to borrow credit for your business, bankers have to consider your current personal credit standing to see how you can handle credit. Usually they will put more weight on the last 6 - 12 months with heavy consideration for how much credit you have, how much of that you are using, and how well you are handling it.


3. Collateral - in order to borrow over $50,000 (and lately sometimes less), the bank wants secondary reassurance that money will be paid back. With collateral, they have an out in case you are not able to pay back - they have something to sell. This could be your equipment or your home. Many people I met with did not want (or their spouses didn't) to take the chance on losing their homes if their businesses failed... but they wanted banks to take the chance on losing that money!

When people were in this position, we always advocated working on these issues for 6 - 12 months, then try for a loan when they are in a stronger position financially. Here is what should be done and some excellent tools to help:

• Check and understand your credit report - Annualcreditreport.com is the website to go to for your free once per year credit report as mandated by the government and provided by the big three Transunion, Equifax, and Experian. Since you can check all three reports at this site, many personal finance gurus advocate checking each report at different times of the year.

• Track your credit score - keeping track of your credit score, in addition to your credit report, can help you keep tabs on the health of your credit. The three major bureaus have products you can buy to access your credit score. Credit Karma provides access to your credit score for free! 

• Make necessary adjustments to reduce late payments, pay off collections, and get rid of credit report errors. Develop a spending plan for the ability to do this, continue paying existing bills, and save money for investment in your business venture. Mint.com is a really cool tool to help with budgeting and understanding your bigger personal finance picture.

These steps are just the basics of what should be done to prepare for business start-up, especially if debt is involved.

Do you think these steps are important for starting a business?  What are some steps you have taken to prepare your personal finances for business? Let me know in the comments below.