During the formative stages of a new business, many entrepreneurs use their personal access to credit to finance business expenses. It is no wonder this is such a common practice. After all, personal credit is a convenient source of financing when obtaining business credit through traditional lenders is next to impossible.
And because personal credit is so accessible, some small-business owners continue to rely on it as a means of financing business expenditures. They may be unsure of how to go about building business credit, or feel they are too busy to put any effort into doing so.
Continuing to rely on personal credit as a business grows is shortsighted, and there are some very serious drawbacks to doing so. What are they, and how can small-business owners avoid them?
Limited Access to Capital
The credit limits granted to creditworthy businesses tend to be much higher than those offered to individuals, and the costs associated with expanding a business are often more than an individual’s credit can bear. Small-business owners who finance their businesses using personal credit may reach a point where their businesses can no longer continue to expand, due to a lack of available capital.
One of the most important reasons to establish business credit is to limit personal liability for business debts. Personal credit cards, loans, and lines of credit are tied to a business owner’s Social Security number, and thus, to their personal credit ratings.
In using personal credit products to pay for business expenses, business owners risk more than business failure; they also put their personal assets, such as vehicles, homes, and investments at risk. This increased personal liability can stall business growth, as well, once business owners reach the limits of their tolerance for personal financial risk.
Using personal credit for business expenses causes businesses to miss opportunities to build business credit, one a business’s most valuable intangible assets. Potential business partners respect creditworthy businesses, because they know the business owners take their business’s credit and reputation seriously. Vendors trust businesses with solid credit to pay their bills on time, and will therefore allow them to finance business expenses, easing cash flow management. Clients feel more comfortable doing business with companies that have good credit, because they see it as a sign of stability and longevity.
The bottom line? If your business does not have a solid credit rating, you are probably missing out on more business opportunities than you realize.