According to US Bank’s Jessie Hagen, 82% of business failures are due to poor cash flow management skills. Failure to understand and manage cash flow effectively can lead to poor personal and business credit scores.
Small business lenders look at both your personal and business credit histories which means personal credit affects small business borrowing. They almost must because so many small businesses have not started building their business credit.
But even if you do have stellar business credit, if you operate as a sole proprietorship or general partnership, your personal credit will always be considered when you apply for loans for your business.
The drawback is you, as the owner, – not your business – have to repay the loan even if the business fails. Businesses can also obtain more funding than personal borrowers.
The National Small Business Association (NSBA) 2017 Year-End Economic Report indicates 73% of companies were able to obtain desired financing, but 31% said their growth was being restrained by inability to get funding.
How to Separate Personal and Business Credit
The NSBA report also shows that 87% of small business owners could separate their business and personal credit files. Their stats from December 2017 show:
- 12% Sole proprietor
- 2% Partnership
- 19% Corporation
- 33% S-corp
- 35% LLC
87% could choose to position their business to no longer be tied to their personal credit history because they are incorporated or have established an LLC. They are also protecting their personal assets should the business fail, but only if they have not provided personal guarantees on debts.
Separating your personal and business credit insulates one from the other in the case of unexpected downturns personally or in business. Wolters Kluwer recommends the following steps to make it clear that the business operates separately from the owner. Most businesses will have already taken many of these steps:
- Incorporate your business or form an LLC
- Obtain a federal tax identification number (EIN)
- Open a business bank account
- Establish a business phone number
- Open a business credit file
- Obtain business credit cards with a company that reports to the credit reporting agencies
- Establish a line of credit with at least 5 vendors and/or suppliers
- Always pay your bills on time
Review what business credit agencies consider when calculating your credit score so you are clear on how to manage your finances.
Consider paying your bills ahead of time as that can improve your score.
Also, consistently use your business credit cards and keep them paid off monthly to exhibit excellent credit utilization.
Small Businesses Fail Due to Lack of Cash
Even if you do not plan to borrow money now, bear in mind that statistics show 29% of small businesses fail because they run out of cash. Even if you plan well, it is impossible to anticipate all the variables that can affect your business.
Being able to get a loan to expand, hire new employees, take on a big client, or deal with unexpected emergencies provides peace of mind. Having a credit rating that allows you to get favorable interest rates and credit terms with both banks and vendors will speed your success.
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