Can Your Personal Credit Score Impact Your Business?
Starting or running a business frequently involves lines of credit. As business owners know, inventory must be acquired, rents must be paid, and wheels need to keep on turning. Many entrepreneurs just starting out frequently rely on their own personal credit to get their businesses off the ground.
However, depending on the type of business structure you choose for your business, your personal credit score may have a negative impact on your business.
Sole Props Are at Risk of Credit Flops
For most small business owners, the fact is that your personal credit score is one and the same as your business’s credit score. That’s because most small business owners are not incorporated, let alone structured as anything other than a sole proprietorship. As a sole proprietor, you and your business are one and the same, for better or worse, for richer or poorer, in good credit and in the bad.
This means that if you are having personal debt problems and can’t get approved for credit, you could wind up having the same debt problems for your business, and vice versa. If you get sued and lose, even for reasons unrelated to business, your business assets can be pursued if you can’t satisfy the judgment.
Getting Your Business Credit
Rather than rely on your personal credit for your business, which could create problems both for you and your business if either struggle with debts and creditors, if structured properly your business can develop credit of its own.
Generally, in order for your business to qualify for its own credit, it will need to be incorporated, or structured as a non-sole proprietor entity. This means you need to do some paperwork, register your business, and likely complete a whole host of other steps, and even pay state or local fees. Additionally, for the sake of personal legal liability, you need to abide by the separation of personal and business. The good news is that after your business is established as a separate entity, not only will you be able to get separate lines of credit for your business, but you may also find some insulation from personal legal liability (i.e. someone injured at your store will recover from your business only and not you personally).
Unfortunately though, despite formalizing a business structure, you may still need to spend some time developing your creditworthiness. This is especially true if your personal credit history is bad, and your business lacks sufficient capital or assets. After all, no credit is bad credit.
Published at Tue, 07 Mar 2017 18:57:44 +0000