It may seem as though it is getting more difficult to establish business credit. Some traditional sources of easy credit for start-ups are becoming harder to qualify for. Thus, it has become increasingly common for entrepreneurs to put their personal credit on the line in order to finance their businesses.
They may find it difficult to acquire financing due to the fact that their business has limited credit history, so they may sign as a personal guarantor for loans, or put personal assets up as collateral. In fact, nearly half of all small business owners in the U.S. are using personal credit cards to cover business expenses.
The problem with these practices is that those who follow them risk their personal assets if the business fails. They are also missing out on valuable opportunities to establish business credit. So, what can small business owners do to correctly manage their personal debt while trying to build business credit?
How Personal Debt Affects Your Business
If you take all of the proper steps and time everything just so, it is possible that you could establish business credit without taking on any personal debt, but this can be quite difficult to achieve. Even with an excellent business plan, unforeseen contingencies may arise which necessitate putting your personal credit on the line in order to help your business thrive.
However, if you haven’t managed your personal credit well, then your personal guarantee is unlikely to be worth much to a lender. They want to know that you (and your company) are a prudent investment, and why wouldn’t they? Therefore, if you are even considering starting a business, you must treat your personal credit as the asset that it is.
Chances are, you already know how to do this (monitor your file, pay bills on time, keep your balance below 30%, etc). The rules to maintaining good business credit are basically the same, so keeping up on your personal credit not only important for your business’s growth, it’s also good practice.
The Benefits of Transferring Debt
If you’ve already taken on personal debt in order to finance your business, you can transfer personal debts (or assets) into your business’s name, once you’ve incorporated. Debts are transferred by creating a legal document known as an “assignment of debt.” The members of your company must vote to approve the adoption of the debt, and this transaction should be documented with a written resolution.
Assets can be transferred with a bill of sale. It is important to note that while the debt would then be under your company’s name, you are still personally liable if your company fails to fulfill the obligations of the debt.
So, why would you transfer debts or assets into your company’s name? The advantage of transferring debt is that your company will build business credit as the balance is paid off. Even though you are still liable for this debt, the track record established by paying off the amount owed under your corporation’s name may prevent you from having to be personally liable for future financing. If you transfer assets into your company, this will have the effect of increasing its asset-to-debt ratio, which tends to have a favorable effect on its credit file.
If You’re In Debt Trouble
Finding yourself drowning in debt due to financial hardship is a very stressful situation. You might be tempted to burn all of your mail and never answer your phone. However, this is a poor way to handle the situation. You’d be much better off by summoning your courage and simply picking up the phone and calling them back.
Your creditors are in the business of profiting by lending money. They would rather make arrangements that will allow you to repay your debts in a fashion that your finances will permit, than allow your accounts to go to collections, or be forced to sue you. The main thing to remember is that they cannot make arrangements with you if you don’t ask them.