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01.28.2010 / Manage Your Business Without Jeopardizing Your Personal Credit

Whether you are starting, maintaining or growing a business, there will come a time you will need credit. The question for many small business owners is whether or not to use personal credit... and how much to use. Personal credit can be a fine line to navigate.

"Owning a successful business, after all, is the "American Dream" for many."

Since most lenders do not report business loans to the credit bureaus, most lenders check the small business owner’s personal credit. The lender needs to get a feel for the owner’s ability to pay by assessing how they manage their personal finances. This is common because of the direct relationship between the owner’s income and the business’ profitability. To further gauge the potential to pay, lenders will also look at the owner’s business plan.

With this in mind, it is important to think about how you structure a business loan. Whether the loan is done as a personal or business loan - and what is used to secure the loan - will have a significant impact on the long-term implications of borrowing.

Mortgaging a home, personal credit cards and personal lines of credit are often solutions business owners turn to. While using personal credit lines can be quick and relatively easy, it does not come without risk. Since there are no guarantees for businesses, the potential of losing a home, personal property or seeing a gradual decline to personal credit scores are all risks of using personal credit. Be sure that you are comfortable with these risks (and confident with your business plan) when using personal assets as collateral.

With that said, personal credit sometimes fuels the initial growth of a new business. In turn, that initial investment in owning a business can be the driver of personal financial success. Owning a successful business, after all, is the “American Dream” for many.

As you think about borrowing – and using your personal credit – for your small business, here are some tips to keep in mind:

  1. Don’t borrow until you are ready. Generally, the funds from a loan should be invested in business activities that directly result in revenue.  
  2. Have a clear purpose for borrowing. Your lender will ask for something more specific than operating capital.
  3. Think about two sources of repayment. The revenue from the business should serve as the primary source of repayment. The secondary is generally a personal guarantee and some sort of collateral,

Do you have any other small business tips you can share?  Let us know what’s worked for you! 

Posted at 09:46 AM | Permalink

Comments

Yes this is what I'm talking about. There are some great business loans out there that will base it against your company's credit card processing not your personal.
Posted by Business Loans at 03:47 PM, Jan 27, 2010
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