How to Recognize and Remove Personal Financial Commitments when Establishing Your Business Credit

Removal of Personal Financial Commitments when Establishing Business Credit

Gaining business credit is, without any doubt, vastly important if you are looking to establish a large-sized business that will see you earning enough money to have a comfortable retirement. The undeniable fact is that you will only get so far just using the profits of your business unless the service or product that you provide is so indispensable or so good that it takes off in a way that no one could really have foreseen. In order to grow your business, you will need to take out lines of credit from time to time.

Many people's approach to securing credit is to do it off their own backs, before the business is even registered. While this is a more straightforward way of doing things initially, you will find that should things become a bit more complicated down the line, you will be in a very restricted, prohibitive position. This will affect your personal position in a big way and is less than welcome at a time when you will need some breathing space.

Even with business credit lines established, some people in business run into situations in which they believe they must put up money themselves. By taking out a personal loan for money they then put into the business, they are directly tying their own personal situation to that of the company. Although it would be naïve to imagine that a person's own situation is not already linked to that of his or her company, it is certainly not desirable to make this link any more absolute than it needs to be. Although we would all wish to enjoy the successes of our companies, and would all unquestionably feel the pinch of things going wrong for them, to create a situation where your own future is so dependent on that of your company that the two cannot be separated does not make sound business sense in any way. Apart from anything else, it robs you of the sense of perspective that is essential in making composed, focused decisions.

Some people take the step of taking out a second mortgage on their home either to increase the earning power of their business or to bail it out when it is in trouble. Some even do it to start their business up in the first place. This is entirely understandable; after all, if you truly believe in a business, you will want to do everything you can to make it work.

However, there is too much at stake to make this a sensible business decision. Yes, you want your business to work. Yes, you would be distraught if it went to the wall. Yes, you will lose your house if the plan does not work and you find yourself unable to make repayments. Your business is important, hugely so if it is where you make your livelihood. Even so, it is not more important than the roof over your head. If you really must use something that you own to provide security against a loan, you should ask yourself if you really should be taking out a loan in the first place. If you decide to do this, you must be absolutely certain that the collateral is something you can afford to lose.

It is much more desirable to ensure you have ways of securing credit for your business without having to provide personal guarantees. If you can get a loan on the strength of your business credit rating, then do so. If you have registered as a limited liability company (LLC) or a corporation, this will mean that all of your personal assets are protected. If you take out a business loan as opposed to a personal loan, and your company goes bust, then the company's assets are at risk. That is not what you would wish for, but would you rather lose your office or your home?

If you are keen to build business credit without having to give personal guarantees, you will first need an Employer Identification Number (EIN). This needs to be requested from the government and identifies your business in much the same way as a Social Security number identifies an individual. With this in hand, visit a number of suppliers in your local area who provide things that you will need in order to run your company properly. Request to set up a credit account with a few of these, and if they agree, ask whether they report credit payments to the credit bureaus. Even if they do not, it may be worth having an account with them, but if they do then you are well on the way to building a credit record without having to give personal guarantees. On top of this, register with the three major credit bureaus and report your credit payments to them as and when you make them.

The overall effect of doing this is that you will build a credit record far more quickly than if you just take credit when you need it. The advantage of doing so is that you will have a credit score far in advance of what you would have otherwise and will be able to rely on the big credit payouts when you need them in order to push forward, without needing to put your own personal finances at risk.

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Debt is accepted as a fact of life more and more in today's society, and nowhere is this more the case than in the world of business. There is a general widespread belief that in order to get what you want, and even what you need, you will need to take out credit. Not everybody agrees with this, and certainly in everyday life, if you can make a life for yourself without taking out credit it is worthwhile trying; it will make for a quieter life if you do not have to make payments every month or every week. In business, however, you will have times that require some funding to see you through, and to secure this funding there may be a need to take out lines of credit. It becomes less a matter of avoiding business debt – because such a thing is more or less impossible in the first generation of a business – and more a matter of attempting to control it.

Controlling debt is likely to be the best that you can hope for when it comes to business borrowing. Any borrowing that you do will immediately become debt because you owe that money to someone. In years gone past, the term "in debt" would have sent shudders through many people. Now it is accepted as a reality by a lot of people, who realize that in order to get to the top business-wise you will need to spend money that will not always be readily available. Taking out a loan or a credit card will be a necessity. The important thing to realize is that being in debt is not the end of the world, but it needs to be done responsibly. You may well find that a lender is willing to give you a very large loan, more even than you need. This is undoubtedly a tempting offer, but one that should be resisted. You should only borrow as much as you can comfortably pay back.

As long as you only borrow what you will be able to pay back, you will positively affect your credit rating. If you borrow more and find the repayments difficult, not only will it affect your credit rating adversely, but it will prevent you from operating as freely as you would like to in a business setting. The best approach overall is once you get the money, place it in a savings account. Withdraw money to spend as you need it, but leave the rest in the savings account, where it will earn interest and can be used toward repaying the loan. If you are lucky, you will get a loan at a rate of interest that is lower than most and close to the interest rate offered by a savings account. This makes the debt more manageable, and puts you in a position where you can control your situation.

Interested in learning more? Why not take an online Business Credit course?

Managing your business debts is important. It allows you to operate your business on a level that is continually sustainable and is beneficial to your cash flow. Not only does it keep more money free for business needs but allows you to build a credit rating that will be helpful in terms of borrowing more as your business grows. As a rule, if you run your business sensibly you will have money coming in at a greater rate every year. Therefore, if you take a sensible approach to borrowing for your business needs, you will find that you can afford to pay off the higher monthly payments that come with higher amounts of borrowing. A higher rate of borrowing will mean a higher rate of debt. This is not a bad thing in and of itself because, if your business is operating as it should, the higher rate of debt will be offset by the higher earnings of your company.

It is important to take the attitude that debt is not something that should be viewed as a negative just because the word itself has bad associations. One day, you may well be running a company debt-free. In the early days of your company, it will be difficult to achieve everything you want without a little bit of debt. Nevertheless, if you are managing your debts sensibly it will make things easier from year to year. It will also mean that you are not likely to be tempted to borrow money as an individual, offering personal guarantees to secure it and risking your own situation or home. You will not be tempted to remortgage your home, risking repossession. Bit by bit, the business will become a great deal more fluid. No business runs itself, but a well-managed business with well-managed debt will be easier to run and give you more space to deal with things in your own way.