7 Serious Business Credit Mistakes Small Business Owners Make And How to Prevent Them

Borrower Beware:

Your company must have cash to grow.

No surprise there, every business needs money to take care of overhead…Meet payroll…Pay for supplies…Grow…And to…Well…Stay in business.

But how you acquire that money…And what you do to get it…Can have a grave impact on the future of your business.

That’s what this article is for. To alert you of the hazards and risks in following what might seem to be typical wisdom in financing your business. And to show you an alternative.

Serious Mistake #1 — Using personal credit to finance your business

It’s also the most widespread faux pas. And it ranges from paying for business expenses with your personal credit cards to obtaining personal loans to finance the business and its expenses.

When you use your personal credit to buy business items, you reduce the amount of credit you have open for personal and family use. You’ve already used if for business expenses. And should you need that credit to see you through an emergency such as an accident or illness that keeps you from working you might be in a real bind.

How to avoid it:

Get credit based on your business’ employer identification number (EIN). Not yours.

Serious Mistake #2 — Putting personal assets at danger

This one is a lot like #1 and it’s equally hazardous. It comes from putting your assets your residence, for example up as collateral to secure repayment of a loan for your business.

The danger is that if your business should fail and 85% of all small businesses do within their first year you could lose not only your company but your home or any other asset you’ve pledged.

Remember, if you have personally guaranteed any type of credit for your business and your business can’t pay off its debts, you’ll have to repay the loan. Personally.

How to avoid it:

Incorporate your business rather than establishing it as a sole proprietorship. When prepared appropriately incorporation can shelter you from personal liability for the company’s debts and also offers other tax advantages as well.

Serious Mistake #3 — Not paying bills on time

Certainly seems like common sense, right. After all, how can you expect to build excellent credit if you don’t pay your bills on time?

But when cash flow isn’t exactly flowing, it’s easy to get behind on the bills. And that can take your business down the tubes.

As an entrepreneur, you can’t afford even a single overdue payment. Your credit file is a complete history of your credit activity. One late payment can be held against you for years. And it can be the basis for denying you additional credit when that credit is crucial to your company’s survival.

How to avoid it:

Pay your bills both personal and business on time. If you should be late with a payment, call the lender immediately, explain the circumstances and indicate it won’t happen again. If you’re fortunate, you may head off a harmful report.

Serious Mistake #4 — Using your family’s money

Maybe it’s convincing your partner to use his or her credit card to purchase inventory. Or perhaps its borrowing from money you’ve set aside for paying for college or for retirement. Or investing your savings into your company. No matter. It all adds up to one big blunder.

As we’ve pointed out, over half of all small businesses fail in their first year. Some say the percentage is actually much higher.

Why does this matter? If your business fails you could wipe out not only your own finances but those of your family as well. Just imagine how you’ll feel telling your kids they won’t be going to college.

How to avoid it:

Maybe investing the family nest egg into the business seems like a good scheme. It isn’t. Keep your business and family finances separate and clear-cut.

Serious Mistake #5 — Contaminating your credit

That happens if you fail to keep your credit history completely separate from your spouses. If your spouse isn’t as punctual in paying as you are you can, subsequently, end up with a worse credit score.

It gets even worse if you’re using personal credit to finance your business. The contamination can keep you from obtaining the financing you need to keep your company growing.

How to avoid it:

Maintain separate credit accounts. That way you’ll have separate credit histories so one spouses late payments won’t compromise the others rating. And keep your personal credit separate from your business credit.

Serious Mistake #6 — Failing to incorporate

Incorporating your business sets its assets apart from your personal ones. Which means that if your company is ever sued and the judgment goes against it your home, car or other personal assets can�t be touched.

Equally important, incorporation puts you on the path to establishing corporate credit. And that is what will allow your business to ultimately grow.

How to avoid it:

It isn’t rocket science but it does require a little paperwork. If you aren’t familiar with this, you may want to contact a lawyer who has an excellent reputation for setting up corporations. I may be able to assist you with this.

It’s also not a bad idea to maintain a physical office even if it’s a home office and get a local phone number in your company’s name. And if your business industry requires such, you’ll also need to obtain the appropriate business licenses.

Serious Mistake #7 — Going it alone

You know that if you go to your bank for a business loan, they’re going to require that you show them all of your business financials for the past two years. And if you’ve only been in business six months, that could be a problem.

And you certainly don’t want to encumber your house or other personal property with a bank loan. Because if your business goes south, it’ll take your house and possessions with it.

You’ve heard about corporate lines of credit. And that sounds perfect for your business. So you apply for one. And sit back and wait for the money you need.

I wish it was that easy… Fact is: 8 out of 10 new business owners who apply for corporate credit lines are not approved. They are turned down flat and never know why.

The reason? They’ve failed to present their businesses in a way that lenders can properly value them. Their companies may be strong and healthy, but because of the way the information is organized, the lender can’t see it.

How to avoid it:
Learn the insider knowledge a business credit expert can provide you with. For instance, learn the 36 areas that a lender’s automated system will review prior to issuing you and your business a line of credit.

Our proprietary Business Aptitude Evaluation Report is tailored specifically to you and your business which covers these 36 different parameters that we’ve found that can significantly impact the approval success of any loan application. Once completed, the Report provides a thorough evaluation of your company and recommends the specific actions you should take to improve any deficiencies.

The result? Your business becomes Bank Ready and ready to withstand scrutiny from even the most cautious of lenders. Not only that, it looks like the kind of company any lender would be eager to lend to.

Make no mistake about it, there’s a right way and a wrong way to go about getting financing for your new business.

Remember, image is everything. And when it comes to financing your business, your business image can mean the difference between risking your savings and getting approved for the financing your business needs to reach tremendous success.