One of the first rules of running a small business or a home business is that you should keep your personal expenses separate.
As much as you would like to keep things separate, however, the reality is that when it comes time to apply for business credit, whether you are looking for a business credit card or whether you want a small business loan to help you expand your operation, your personal credit matters.
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Personal Credit Consideration for Business Credit
While you want to keep business and personal finances separate for accounting and tax purposes, it's important to understand that lenders are going to check your personal credit history when making decisions about whether to extend you business credit.
The fact of the matter is that lenders are in business to make money. When you consider that about 50 percent of small businesses in America fail in their first five years, you might see why some lenders are reluctant to risk their money on your behalf. If your business fails, and you can't repay the loan, the lender might be out some of their money.
In many cases, especially if you are just starting up and you don't have a business credit history, a lender will want to see your personal credit history. If you have good credit, the lender is likely to believe that you will take the necessary steps to be responsible with your business obligations.
On top of that, some lenders ask for a personal guarantee of your business loan. It's best to avoid a personal guarantee of business credit since this can impact your personal credit. And, of course, if something goes wrong with your business, your personal guarantee means that your business creditors can come after your personal assets.
Unfortunately, you are often required to provide a personal guarantee, especially if you don't have business credit built up. Once your business establishes its own credit, your personal situation will be less important. However, if you remain integral to your small business or home business, no matter how good your business credit is, there are some lenders that will still want to check your personal credit score before lending money to your business.
You Still Need a Good Business Plan
Even if you have an amazing credit score and plenty of personal assets to guarantee your business loan, it doesn't mean that you can sit back and relax. Most business lenders want to see a good business plan. This means that you need to create a long-term business plan that can guide you to success.
In most cases, small business lenders want to see that you've thought things through and that you are building on a solid foundation. Part of offering this proof is showing that you can maintain your own personal credit. You should also show that you have some skin in the game by indicating that some of the funding for your business startup comes from your own resource pool. Finally, create a good business plan so that the lender can see that you have developed a road map to success.
It's nice to think that once you start a small business, you never have to worry about how your personal finances impact it; however, the reality is different. For many small business owners, the way the business goes matters very much to the outcome of their long-term personal finances.
You can keep your business and personal expenses separate, and even file separate tax returns for your business, but when it comes to your credit, and the practical influence of finances, the two are likely to remain close.
