One of the things I’ve realized as I’ve been in business for myself is that sometimes, no matter how much I try to keep personal and business finances separate, sometimes they intrude upon each other.
Your business credit is most likely to intrude upon your personal finances, especially if you haven’t established business credit on your own yet.
Looking at Personal Credit Factors for Business Credit
When you first apply for a business credit card or a small business loan, the lender doesn’t have anything to judge your business by. You haven’t been around long enough to establish a credit reputation as a business. As a result, the lender will turn to your personal credit to see where you stand.
One of the parts of your business plan, if you are asking for financing from someone, is a section on the financials of you and any partners or principals you have in business with you. Whether it’s a lender or an investor, no one wants to put money into your business if you aren’t showing your own financial stability and capability.
This is true when you apply for more mundane business credit as well. When you apply for a business credit card, you might have to share information about your personal finances — and you might be denied a credit card for your business based on your questionable personal credit.
We like to think that we are separating our business and personal finances for liability purposes, but in some cases your personal credit will have bearing on what you can accomplish with your business.
Personal Guarantees and Business Credit
In some cases you might even need to make a personal guarantee to get a business deal done. It’s always better if you can avoid guaranteeing your business decisions and deals with your personal assets, but sometimes it’s unavoidable.
Rarely does someone want to take a chance on your business if you can’t back it up with your personal assets. While you can create all sorts of legal barriers between your business and your personal finances, sometimes you have to promise that you have skin in the game — and something to lose.
As your business improves and grows, it’s easier to separate your personal guarantee from your business, and you can put fewer of your own assets on the line and instead back your entreneurial ventures with business assets. But it can take a while to get to that point.
Before you go looking for business credit or other backing from someone else, make sure that you are comfortable with the realities of the situation. Ensure that you have enough that you won’t be completely at risk if something goes wrong, and make sure you are ready for almost anything.
And, as soon as possible, make whatever changes you can to your business so that you put more distance between it and your personal assets.