Using one’s personal credit to access the capital necessary for starting a business is very common. Many people take out personal loans to get new business ideas off the ground, and using credit cards to finance startup costs is one of the most common methods of funding a new venture.
While leveraging personal credit for the expenses associated with starting a new business may be common practice, continuing to commingle business and personal expenses and credit is far from being a best practice.
Why must entrepreneurs separate their business and personal credit as early in the life of their businesses as possible? And once business and personal finances are separated, why is it so important that they stay that way?
Protection From Personal Liability
Once a business has been legally structured as an entity distinct from its owner, and has built a solid business credit rating, it is capable of being the responsible party for business debts. This shields the business owner’s assets from business debt liability. In the event that the business becomes insolvent, the business owner’s assets will be safely out of harm’s way.
But if the business owner uses personal lines of credit to finance business expenditures, the fact that they are “business-related” is immaterial. If the business is unable to generate the revenue necessary to cover the costs of these expenses, the business owners may find themselves stuck paying off costly equipment with no business profits to aid them.
Not only that, but commingling business and personal finances may give collecting creditors the legal right to “pierce the corporate veil,” allowing them to pursue the owner’s personal assets in the name of satisfying the business’s unpaid obligations.
Starting a business is a risky proposition in any case, but there is no need for small-business owners to risk more than is absolutely necessary.
Easy Expense Tracking
When a business’s expenses are kept separate from personal transactions, they are much easier to track. This is especially useful when tabulating deductible expenses for tax purposes. Those who charge business expenses to personal credit cards, or use business checking accounts to pay for personal expenses are likely to miss money-saving deductions. Not only that, but they may even attract the scrutiny of the IRS, and a tax audit is not something any small-business owner would choose to undergo.
Business Credit Is a Valuable Asset
Business owners who use personal credit to finance business expenses are missing out on opportunities to improve their business credit rating. By utilizing business credit products consistently and responsibly, business owners can increase their business’s capacity to borrow money on favorable terms. The financial flexibility that comes with excellent business credit can be a key factor in helping a business grow and succeed.