It is critical for those running a business to keep their business credit and personal credit separate. While this isn’t much of a problem for medium to large businesses, it is a common mistake made by small businesses. Below are some tips for making sure the two types of credit are kept separated.
Use Your Business Loan Carefully
Business loans should always be used with great care, as most will require personal guarantees with the understanding that you will cover the debts yourself to receive approval. You should check with potential lenders to determine whether or not they will reveal balances and payments to the credit bureaus. Some lenders will only notify them if you’re over the limit or late making a payment.
Regardless of what financing you choose, it is important to maintain wise spending habits. Be sure that all debt payments are made by the deadline, and keep the balances on your credit cards at no higher than 30 percent of your limit to avoid any negative effects to your personal or business related credit score.
Your Personal Credit Is Not Capital
Some business owners have the temptation to use their consumer credit card to purchase business related goods or to fund business activities but even the lowest charge can add up quickly. Additionally, any issues that you run into with your consumer credit card, such as a large balance or payments which are missed will show on your credit score and can adversely impact it.
Transforming your business into a C Corp, LLC or S Corp gives you a number of advantages. For one, you will be protected when it comes to personal liability in regards to any debt the business acquires. However, it is best to speak with a lawyer to determine which option is best for your particular situation.
Always Maintain Separate Accounts
Business and personal accounts should always be separated. When you mix personal cash with business related cash it is a recipe for all sorts of potential problems. For instance, if you miscalculate you may find yourself in a position where you’re unable to cover business expenses. Additionally, many banks offer special checking accounts where financial fees are waived, along with other perks, such as interest rates which are lower.
Always Maintain An Emergency Fund
Insurance alone is not enough to cover all the expenses a business may incur, so it is best to setup an emergency fund. It is recommended to put away a minimum of 3 to 6 months’ worth expenses for an emergency. The best way to setup such a fund is to automatically transfer some of the revenue flowing into the checking account for your business to a business savings account.
Maintaining business and personal credit may be challenging, but the benefits are worth it. Furthermore, by utilizing the best practices above you can make the process a lot easier, while increasing your credit score.