|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
How Carrying Business Balances on Your Personal Credit Cards Can Sink Your Credit Score
One of the core pieces of advice that business owners should follow is to not mix business finances with personal finances. The reasons for heeding this advice are many. Commingling business and personal finances can complicate record keeping and tax filing. It can also lead to legal problems should your business face any sort of liability which could put your personal assets at risk. The problems of commingling are further compounded if you develop the bad habit of carrying business balances on your personal credit cards. Quite simply, it can sink your credit score which could make it very difficult to get financing for your business.
Factors That Affect Your Credit Score
There is no mystery to what factors can adversely affect your credit score. Certainly missed or late payments are a primary factor. Because this is often the result of amassing more debt than your cash flow can support the next most important factor that is considered by credit rating agencies, is the size of your balances on each credit card. The key determinant is the size of the balance in relation to the available credit. Even if, you make your payments on time, carrying large balances will cost you points on your credit score.
Preserving Your Personal Credit
It is understandable why new business owners would use personal lines of credit to finance business expenditures. In a young business, cash flow is usually an issue, and it’s too soon to be able to establish a line of credit for the business. But once the balances have been run up on your personal credit cards, it will be difficult to qualify for additional personal credit much less business credit. It is important for new business owners to manage their credit so that they are not cut off from all forms of financing.
Credit card expenditures need to be weighed carefully against the prospects for generating a sufficient return on the expenditure that will go to repay the debt. The general rule for businesses, and individuals for that matter, is that if it takes a credit card to cover the expenditure, it is probably not affordable and the purchase should be delayed. If there is a possibility that the expenditure will not be repaid within a couple of months, then you should consider a smaller purchase. If a large expenditure is required, other methods of financing should be considered, such as a personal loan from a relative or a collateralized loan such a home equity line of credit.
Building Credit for Your Business
It is important for a business to qualify for its own credit. While this is difficult to do for a new business, steps can be taken early on that could result in more immediate consideration by a bank. Any business can work towards developing a business credit score. Paydex, which is a part of Dunn and Bradstreet, is a system similar to individual credit scoring.
The easiest route to building a Paydex score is to apply for an ID number with them and then open up some small lines of credit with office suppliers such as Staples. These suppliers report directly to Paydex on the payment history of the business. You can build a solid Paydex score simply by keeping your payments current.
Having a good business credit score does not mean you can let your personal credit score slide. Your business credit worthiness depends on both your business score and your personal score. The best credit management practice is to keep your balances low on both business and personal credit lines.
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