Considerations When You’re Financing a New Small Business
While accountants may advise small business owners to keep personal and business finances completely separate, the reality is that the lines often blur. We’ve all read about entrepreneurs who used personal credit to fund a venture that paid off big. There are just as many stories of small business owners who wound up deeply in debt when their venture failed.
In an ideal world, you would always get a small business loan to finance your start up, paying for operating expenses with a business credit card. It can be difficult to acquire business credit, however, when your business is new and has little credit history. That’s why more than one entrepreneur has launched his or her small business with personal credit such as credit cards. In fact, personal credit is the second-most common source of funding for startups, surpassed only by personal savings, according to Gallup.
If your venture succeeds, you can repay your personal credit and end up with a good credit history for yourself and your business. If your business folds, however, its failure won’t absolve you of responsibility for your personal debt, so it’s important that you understand how your business struggles can affect your personal credit.
Before you take the leap into launching a business using personal credit, be sure to explore every possible source of business funding. The U.S. Small Business Administration offers information on small business loans and funding sources. Finding a loan, grant or other form of small business funding may take more time and effort than using personal credit, but doing so can help protect your personal credit report and scores from potentially negative effects if your new venture struggles or ends up not getting off the ground.
If you decide that you’re going to use personal credit to finance a business, it’s a good idea to build up your lines of credit before quitting your steady employment. Pay down personal credit card debt before adding business debt to it. Be sure to keep paying personal bills on time and keep an eye on your credit utilization ratio. Good credit is a valuable ally in both personal and business finance.