To Roshini Rajkumar, there are few feelings worse than being in debt.
“I have a very high level of stress with debt,” she admits. “If I could live my life never charging a thing, I would, but that’s not practical as a business owner.”
Rajkumar is the founder of Minneapolis-based Roshini Multi Media, a communications and media-consulting firm she started four years ago.
The good news about Rajkumar’s aversion to debt is that, when she launched her business, she had stellar personal credit. Years of financial responsibility landed her a FICO score of more than 800, which is about as good as it gets.
Based solely on her personal credit score, Rajkumar was able to get a new business credit card from U.S. Bank with a $13,000 credit limit. What’s more, the card issuer waived the annual fee.
How important is good personal credit when launching a business? “Now more than ever, it is absolutely essential,” says Wayne Sanford, founder of NewStart Financial, a credit-consulting company, and author of The Credit Reality Today. “Banks are shrinking their credit lines and limiting their risk. If you can’t handle your personal credit, what makes them think you’ll be more responsible when it comes to your business?”
For debt-averse Rajkumar, getting a business credit card was easy. The hard part was putting it to work. “I knew I needed to start charging on the card, even though it wasn’t in my nature,” she says.
One day her financial advisor sat her down and congratulated her for building great personal credit. Then her advisor explained that it was time to start over: Rajkumar would have to spend the next several years building great business credit.
“My advisor insisted I start using the card right away,” Rajkumar says, “because we had to establish a credit history for my business and prove that we could pay back debt in a timely manner.”
The fact of the matter, adds Sanford, is that you can’t build business credit without incurring some form of debt. “It doesn’t have to be a lot,” he says. “Even carrying a minimum balance is better than carrying no balance at all.”
For the next year, Rajkumar went about deliberately charging business expenses –everything from office equipment to business lunches to promotional materials — all the while carefully managing the balance. Exactly one year later, based on her new track record, Rajkumar was able to open up a $20,000 business line of credit.
A line of credit works like a credit card. The bank approves a business owner for a maximum amount and the owner can spend as much or as little as they choose over an agreed period of time. Rajkumar’s blossoming business credit score allowed her to get approved for the credit line. This year she’ll begin checking her business credit score regularly to make sure it’s exactly where she wants it to be.
Sanford likes this approach. He believes it’s a good rule of thumb to subscribe to services like Dun & Bradstreet, which alerts business owners to any changes in their credit scores. For businesses like Roshini Multi Media, which might not need weekly or monthly updates, he recommends purchasing a once-a-year credit assessment from D&B, just to get a better picture of the company’s overall health.
An annual assessment is important to Rajkumar’s business, especially since she’s gone on to open several more credit cards and now has a combined credit limit of approximately $100,000. “I would never sleep at night if I ever maxed out my credit, but it’s nice to know it’s there if I need it,” she says. It’s also nice to know that by building her business credit, Rajkumar is also establishing credibility for her business. What’s more, she has cash in her business and is prepared for any future lending needs.
But why does Rajkumar want multiple business credit cards, especially if she doesn’t like the idea of debt? Because it makes good financial sense. Her first card, from U.S. Bank, carried an interest rate of about 13 percent. Later her financial advisor introduced her to an Advanta card that allowed her to transfer the balance from her U.S. Bank card and get zero percent interest for the first year and 7.99 percent after that.
Although her outstanding U.S. Bank balance was only several thousand dollars, Rajkumar transferred it to her Advanta card and was advised to let it sit for a year. “That kind of bothered me, but I knew it was the wise thing to do from a credit perspective,” she says. “You never know when you need extra cash flow, and since I was not getting charged interest, there was no reason to pay it off.”
Rajkumar later turned sour on Advanta. In the heart of the recession, she got a letter from the company announcing that her interest rate was jumping to 24 percent. She quickly got on the phone with Advanta and, insisting on speaking directly with a manager, she was able to keep the rate on her existing balance at 7.99 percent. But she was told her interest rate on any new purchases would still be 24 percent. Needless to say, she’s no longer using the card. Advanta, which specialized in small business credit cards, recently collapsed under the weight of a 35 percent customer default rate.
Another lesson Rajkumar learned about business credit cards is not to provide issuers with a personal federal tax ID number or Social Security number. This makes a big difference from a liability standpoint. If a business credit card is registered under an owner’s Social Security number, the business owner is personally liable. But if the card is registered under the company’s tax ID number, it’s the business that’s liable.
This was an important lesson for Rajkumar, but is less of an issue nowadays for people looking to get a new business credit card. “In the current climate,” says Sanford, “unless you have a longstanding relationship with your bank or very significant business assets, you will be asked to provide a personal guarantee. That’s just the state of the world right now.”
Rajkumar would still prefer to run her business without debt. But she’s learned to live with it. “The truth is, I couldn’t operate my business without it,” she says. “You’ve got to make credit your friend but you’ve also got to stay in control.”