Small Business, Big Credit Dangers
Owning your own business can be a rewarding endeavor, but it isnít easy. Business owners face unique challenges when it comes to everything from health insurance to staffing to finding loans. Credit is one more area where business owners have to deal with an unusual set of circumstances.Your credit & your business
Small business owners often leverage their own credit history and financial standing to invest in their company. Taking out a second mortgage or home equity line of credit (HELOC) to fund your business will tie your personal credit to your professional success. If you donít succeed, you could be at risk for losing your home with those financial vehicles. A personal loan is safer since it isnít tied to your home, but still will appear on your own credit report.
Business credit cards can be an excellent way to track your spending and earn rewards on your business transactions. Most small business credit cards are set up so that the owner, not the business, is directly liable for repayment. Like a personal loan, a business credit card will almost always appear on your own credit report. Any late payments or high balances with these business accounts would hurt your personal credit scores.If you hit a rocky patch
Because small business owners intertwine their business and personal finances, they have a higher risk for credit score damage when things donít go as planned. An unpaid business credit card bill would not only hurt the business but also the ownerís credit history. And visa versa: An ownerís collection account would make it much more difficult to obtain new business credit.
In todayís rocky economy, it is even more important to be prepared for tough times with your small business. Create a plan to increase sales, decrease expenses, boost your accounts receivable, prioritize payments, and/or liquidize assets in the event of a downturn. Ideally, you want to be able to repay the debts in your own name so that you donít face credit issues beyond your business.Building business credit
As your small business grows, you will want to transition from using your own credit to establishing a separate credit rating for your business. You can start by checking to see if your business already has a credit report. Experian tracks over 27 million businesses in their database and will let you check for free if youíre in their system.
To establish your business credit profile, you will need to incorporate or form a LLC for your business first and obtain a federal Employer Identification number. You should also open a business bank account and set up a dedicated phone line. With this preparation, you should have an easier time getting business credit accounts that will be reported to the bureaus.