Turns out, the same goes for business finances and personal finances. Read on to learn how your personal credit can affect your small business -- and how you can prevent the line between the two from blurring.
Generally, business owners try to keep their personal finances and their business finances separate. Unfortunately, that can be difficult to do, especially for a new business, and the result is that the two can affect each other quite a bit.
For starters, it's possible that you might need to use your personal credit to obtain credit for your small business. Business credit can be difficult to get if you don't already have an established business credit report, or if you don't have collateral to offer.
You might need your personal credit to fund your small business.
A business credit card can help you build a business credit profile, but getting approval will likely depend on your personal credit. If your personal credit isn't good enough to get you approved for business credit, that could mean relying on personal credit cards or loans. It could even mean you won't be able to get credit for your new business at all.
P. Simon Mahler is a mentor at SCORE (a nationwide network of volunteer business mentors) who helps small business get started and grow. He explains further why your personal credit is so important for your small business:
"Personal credit is a major factor that influences your company's access to capital, in every aspect imaginable... lenders will look at the personal credit score to see the strength and ability of personally guaranteeing the debt load. From a traditional lender, banks will look at who they are lending to, why they are seeking the money and for what purpose, and then look at the risk of giving them the loan to secure growth for the small-business owner. A poor history of personally managing funds typically can result in a poor history of paying back business debt."
How you create your business could tie your personal credit to it.
The way you set up your business can also determine whether your personal credit has an affect on it. For example, if you start out as a sole proprietor, then your business is tied to your social security number instead of a tax ID. That means any credit you take out for your business could also be attached to you as a consumer.
This is important to note if you're a freelancer. You'll default to sole proprietor status if you take on clients without legally registering your business. If you don't want that to happen, you can create an LLC to keep things separate.
Corporations and some LLCs may obtain a tax ID instead of using your social security number, separating your business taxes from your personal taxes and potentially enabling you to apply for business credit without using your social security number. That said, if you choose to use personal credit to fund any aspect of your business as an LLC or corporation, then your personal credit can still affect your business.
Your business can also affect your personal credit.
Although we're talking about how your personal credit can affect your small business, it's also important to understand when your business can affect your personal credit.
If you've established business credit, you might expect only to see that credit on your business credit report. However, if you personally guaranteed that credit, which can sometimes be a requirement for approval, then that credit could show up on your personal credit report.
It's not so different from what happens when you co-sign on someone else's credit application. Any time you link your personal credit to your business credit application in order to get approved, you can expect that loan or line of credit to show up on your personal credit reports. This is similar to co-signing on a loan for a friend or family member, which can show up on your credit reports. This step might help you get approved for business credit, but it will also link your business credit to your personal credit.
One way to potentially avoid this is to use a business credit card that doesn't report the card activity to consumer credit reporting bureaus. Check with the bank you're working with to find out their policy on the matter.
Some ways to protect your business and your personal finances.
The best way to ensure that your personal finances don't affect your business and vice versa is to keep the two separate. To do so would mean not operating as a sole proprietor. It would also mean not using personal credit to be approved for business credit.
That said, this might be far easier said than done -- especially for new businesses. If your business and personal credit are tied together, you can help protect the health of both by following the basic guidelines that you'd follow on your personal credit:
- Pay all the bills for your business on time and in full
- Don't take out more business credit than you need, and try to keep revolving balances low
- Review your business credit report -- once you have one -- to ensure accuracy and to get a read on your credit profile (see a sample Experian business credit report here to understand what a business credit report might look like)
And if you want to take further steps to protect your personal and business finances, consider talking to a professional financial counselor and/or a lawyer. They can help you plot out a path that makes the most sense for you and your business.
This article originally appeared on UpturnCredit.com and was syndicated by MediaFeed.org.