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Managing Your Personal and Business Credit

When you're a small-business owner, there's a delicate balance between your personal and business credit. Here are some smart tips for handling both effectively.

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A few years ago, there was a survey conducted called the "Panel Study of Entrepreneurial Dynamics." The purpose of the survey was to determine what makes entrepreneurs different from their nine-to-five counterparts. What the survey found was that the differences in attitudes toward risk-taking were negligible, with one notable exception: Entrepreneurs were much worse in coming up with reasons why they might fail in business.

Whether it's positive thinking or self-delusion, it probably helps to have a little of both when it comes to starting your own business. But the harsh realities of financing your dream, especially when it comes to obtaining and managing credit, can quickly become a nightmare if not handled properly. And that can have a chilling effect on even the most determined self-starter.

Take Paul, for instance, who runs a small company that provides audio-visual equipment and services to other small businesses. Like many small-business owners, Paul uses a business credit card to pay for his business expenses. When clients pay him, he pays off the credit card in full to avoid interest charges. The card acts as an interest-free loan when cash flow is a problem.

But Paul got into trouble when an event he was producing got cancelled at the last minute. He'd put $20,000 in equipment and related expenses on his card, charges the client was unable to pay. (Paul learned, after the fact, the client was planning to pay him from the event's proceeds. Another lesson learned.)

Unable to pay off the card in full from company funds, Paul was surprised to learn that he was personally liable for the expenses, payable in full within the month, as part of his agreement with the credit card issuer. So what started out as a business credit problem for Paul quickly became a serious personal credit problem as well.

As many individual small-business owners well know, the lines between personal and business credit aren't always distinct. Any unanticipated event, like a large cancelled order or a delayed payment, can have a ripple effect, disrupting both business and personal credit relationships. And that can lead to a downgrade in your business credit score.

If you're a sole proprietor or a business owner with fewer than 20 employees, your personal and business credit scores are closely linked in the eyes of banks and other potential lenders. So it's important to take steps to protect both--even if you don't plan on applying for a loan in the near future. A low credit score indicates you're a poor credit risk to potential lenders, and can limit the amount of credit they extend to you, result in higher interest rates or mean you're denied credit altogether. That's why it's important to monitor, evaluate and protect your credit standing just as you would protect any other business or personal assets.

As the CEO of a company that helps people monitor and protect their credit, I can tell you the time it takes to implement preventive measures is far less than the time, frustration and expense it'll take to remedy your poor credit history. To help you avoid any credit problems, here are some tips for managing your credit effectively:

  • Get a business credit card as soon as you can after you start your business. This is a great opportunity to establish credit and will make you a more attractive candidate when you go to secure a business loan. But limit the number of cards you use and avoid using high-interest cash advances. When the bill arrives, pay the entire amount in full to avoid finance charges.
  • Monitor your personal and business credit. Use a credit-monitoring service to monitor your credit, or regularly monitor your credit yourself, to ensure that no one's using your credit fraudulently. Open your credit statements as soon as they arrive in the mail and review them, or monitor your accounts online.
  • Don't neglect your personal finances. As an individually owned business, your personal finances will be open to scrutiny by lenders. Don't pay your business expenses by ignoring car or personal credit card payments.
  • Never back a business loan with a personal guarantee. Avoid loans or lines of credit that call for a personal guarantee. If you have to make a personal guarantee, consider it an investment in your business, don't expect to see return on that investment right away, and be ready to invest an equivalent amount of cash.
  • Don't mortgage your house to fund your business. There's no such thing as a sure thing, including your new business. The last thing you want is to lose your business and your house.
  • Sell assets if you must in order to make loan payments. Don't be afraid to sell assets at a discount to get yourself out of debt. And while it's an unfortunate fact that business assets are always more valuable when you don't need to sell them, it's still your best choice.

Michael Stanfield is the CEO of Intersections Inc., a company that provides credit management and identity theft protection tools to more than 5 million customers and many of the largest financial institutions in the United States and Canada.