Does Bad Personal Credit = Bad Business Money Management?

In reply to my recent post about business plans, reader Carlos Hernandez of The Fearless Entrepreneur commented:

Last October I attended "Economic Summit:Accessing Capital" as presented by the Cal State East Bay Small Business Development folks. One big take-way came from a major bank representative, i.e. one could have the best business plan but if their personal credit rating is poor...watch out! They believe that if one cannot manage their personal money, then it is likely they will also mis-manage their business' dough!

Carlos is right that this is the reality you may face as an entrepreneur seeking funding. There's even a trend among employers to include a credit check as part of the hiring process. But this is truly unfortunate, because there are a lot of people (myself included) who are far better at managing their business finances than their personal finances.

See, when it's my own money, I tend to have an "It's only money" attitude, but I'm extremely conscientious about other people's money, whether it be an employer, an investor or a business partner. I make personal impulse buys all the time, but I almost never do in business. When cash is tight, I pay business creditors before personal creditors. I'll fly first class on a vacation and coach on a business trip.

And on top of that, among entrepreneurs, past success or failure is really not a very good indicator of future success or failure.

In fact, many of the world's most famous and successful entrepreneurs experienced dismal failures, even personal bankruptcy, before they made their fortunes, including:

• Donald Trump had not one, but two bankrupt businesses in the early 1990s.
• Henry Ford was forced out of the first automobile company he founded when it went bankrupt.
• Berry Gordy had a failed jazz record store and first record label before hitting it big with Motown.
• Simon Cowell also had two failed companies early in his career.
• James Cash (J.C.) Penney first tried his hand unsuccessfully with a butcher shop.
• Robert Allen declared personal bankruptcy in 1996, but by 2002 was writing best-selling financial advice books.

I could make a very long list, but it wouldn't matter. See, banks (and many investors) play the rules, not the exceptions. If there seems to be a statistical correlation between poor personal finances and bad business money management, then that's what banks are going to act on.

Entrepreneurs need to know that your personal finances will have a potential impact on your ability to obtain both debt financing and equity financing, especially when you're first starting out and don't have a business track record. However, if your personal credit history is poor, that doesn't mean you don't have options. There are ways to build your business credit on its own. You can also explore private lending as an alternative. You also might consider building your personal credit and credit repair.

What do you think? Is poor personal credit an indicator of poor business financial management? Or do you think you can be good at one but not the other?