Corporate taxes are down, consumer confidence is up, so now might be the time for you to pull the trigger and start that small business you’ve been contemplating. After you buy a domain name and register your business with your Secretary of State, you’re going to have to decide how to fund its operation. And unless you’re flush with cash, you are likely going to have to apply for credit.
At this point you’ll have to make a choice between two options, both of which are similar and
different in subtle ways. You will have to choose between using your pre-existing personal credit to fund your business or applying for new credit cards or loans in your company’s name.
Using Pre-existing Credit Accounts
Many small business owners choose to use their existing personal credit in order to fund the operations of their small business. That means using personal credit cards and personal lines of credit, such as home equity accounts. The advantage of using existing credit accounts rather than opening new business accounts is the speed and ease. You don’t have to worry about opening new accounts because you’ve already got them.
The disadvantage of using your existing personal credit is two-fold. First, you’ll be co-mingling business expenses with your personal expenses. So, for example, you may use your credit card to buy groceries one day and the same credit card to buy printer ink the next day. And while that might not seem to be a big deal, your tax accountant would likely disagree because some of your purchases will be deductible and some will not, and comingling requires you to separate your expenditures accordingly for proper and legal accounting.
Opening New Small Business Credit Accounts
What your tax accountant will likely tell you is to open new accounts in your business’s name and then use those accounts to fund the business operations and nothing else. This will ensure proper accounting of all business expenses without the possibility of improperly deducting non-business expenses. But if you choose this approach, you’ll have one more choice to make.
Personally Liable, or Not?
When you apply for business credit the lender may require that you sign a personal guarantee. A personal guarantee means that you, personally, will guarantee payment of the debt if the company ever defaults. If you incur debt on behalf of your company and your company goes out of business or otherwise defaults on the debt, you will have to make good on it even if the money has to come out of your own pocket.
If you do not want to be personally liable for your company’s debt, then you may have a harder time finding business credit, especially if you’re a new company. And there’s another thing to keep in mind if you do choose to go the personal guarantee route. If so, your credit reports and credit scores will be accessed by the lender. If you must sign a personal guarantee, that means the lender feels more comfortable with you as an individual borrower than your company as the borrower. The lender will want to ensure payments will be made if your company defaults, and that means the lender will depend heavily on your personal credit reputation before approving your application.
Disclaimer: The views and opinions expressed in this article are those of the author, John Ulzheimer, and do not necessarily reflect the official policy or position of VantageScore Solutions, LLC.
Popular Articles
Consumer FAQ: Benefits of Adding Rent and Utility Data to a Credit File
Advantage of Adding Rent and Utility Data whitepaper
Credit with a Conscience fact sheet
Driving Financial Inclusion with Data and Analytics fact sheet