Risks of Using Your Personal Credit for Your Business [Why to Keep Business Credit and Personal Credit Separate?]

By Shreya Panchal| Oct 6, 2021| 118 Views
6 MIN
Risks of Using Your Personal Credit for Your Business [Why to Keep Business Credit and Personal Credit Separate?]

According to the Mercator Advisory Group, 36% of small businesses mix personal funds with business purchases.

We get it. Using your personal credit to pay for your business is easy. But by using your personal credit, you’re putting your business at a disadvantage. In this article, we’ll review reasons why separating your personal credit from your business expenses can benefit your financial life.

As your business grows, you might need capital to keep up with your company’s output. If you’re starting a business but don’t have cash to purchase equipment and expand, you will probably need outside funding. Cash is king! But saving money takes time… and when you need equipment now, spending your hard-earned cash can put your business at risk. Fortunately, financial services like equipment financing allow you to keep your cash and at the same time get the equipment you need to grow.

A smiling business owner checks their inventory after receiving financing to purchase needed equipment.

Mixing your personal and business credit comes with a lot of problems. Some problems include:

  • More issues should the IRS decide to audit you
  • Create personal liability issues
  • Failing to build credit exclusively for your business

According to the 2020 Small Business Credit Report, 43% of businesses stated that paying operating expenses as the greatest business challenge, followed by securing credit.

Risks of Mixing Business Finances with Personal Finances

Few things don’t mingle well — like your personal and business’s finances.

According to Mastercard research, 46% of all small businesses use personal credit cards. Many small businesses fail to separate business and personal expenses

Here are three critical reasons why you must draw a line between your personal and business finances:

Taxes

Mixing personal and business finances can lead to disorganized and inaccurate accounting records that end up with penalties or fines if the IRS audits your business. Tax charges are subject to compound interest, which is a significant consideration when your business is hit with an expense it wasn’t prepared for.

Beyond the timesaving benefits from keeping personal and business finances separate, there are few financial advantages involved of filing an accurate tax return at the end of the year. For instance, the ability to correctly authorize payments or deposits as business-related, makes it hassle-free to identify tax deductions and credits you may be entitled to claim.

Personal Liabilities

No one starts a business because it’s easy. If your business struggles, it could become risky for your personal assets and credit. Business owners often use personal guarantees for leases, loans, and lines of credit.

Small Business Credit Survey, 86% of small businesses use their personal credit to fund their businesses

The corporate veil, which refers to the legal difference between a business and its owners, is intended to safeguard the business owners from liability related to the business’ actions. However, mixing personal and business finances could pierce the corporate veil and leave your personal assets vulnerable to business debts, losses, and lawsuits.

Hassles in Bookkeeping

Most bookkeeping operations are a complex web of deposits, payments, and transfers. Since several business owners delay their bookkeeping duties until the end of the year, confusing personal and business transactions are common when using a shared bank account.

If you’ve ever had to filter through months of receipts - or analyze a year’s worth of bank statements, line by line – you will know how time-consuming and laborious a task can be. Establishing business credit helps keep your records separate and easy to manage.

Difficulties in Predicting Accurate Cash Flow

When your personal and business expenses are together in a single bank account, managing and forecasting your cash flow can be problematic.

Having a clear insight into the funds flowing in and out of your business is essential for preventing setbacks and unforeseen cash crunches. That same financial clarity is also significant any time your business needs to:

  • Apply for a loan
  • Obtain new credit, or
  • Gather investment funds

Having clear insights into your business cashflow also makes it easier for potential lenders to approve you for equipment financing.

Business Credit vs. Personal Credit

While business credit and personal credit are often linked, they are, in fact, separate.

Personal Credit Business Credit

Personal credit is based on your personal spending history; meaning the credit that’s been offered to you for personal reasons such as education loans, personal credit cards, car loans, or home loans.

Business credit is based on your business’s financial history—meaning credit that’s been offered to your business for a business credit card or business loan.

Personal credit is linked to you by your Social Security number (SSN).

Business credit is connected to you by your Employer Identification Number (EIN) or Tax ID Number, which is how the government identifies your business for tax purposes. 

Personal credit score ranges from 300-850, with a higher score denoting better creditworthiness.

Business credit score ranges from 1-100, with a higher score denoting better creditworthiness.

FICO is the most used method of scoring personal credit.

There is no similar thing for businesses; each commercial credit bureau scores and reports its own way.

Consumer credit laws permit individuals to challenge anything on your personal credit report and have incorrect negative entries removed.

There are not many legal protections for business credit. It also is not possible to make corrections or remove the incorrect negative entries.

 

Why Do You Need Business Credit for Your Business?

While you may have outstanding personal credit, you do not want to put a business loan in your name for liability reasons, since you could become personally answerable for your business’ debt.

There is always a chance that your business could hit tough times. You wouldn’t want that debt reflected on your own personal credit report.

In few extreme cases, the creditors could even go after your personal assets if you filed the loan in your name. Hence, it is best to build business credit and then apply for business loans with your business’s credit report instead. Establishing your business credit can help you set your business up for success.

According to the NSBA Small Business Access to Capital Study, 20% of small business loans are denied due to low business credit.

Here’s Why Establishing Business Credit is Essential and How Equipment Financing Can Help You Flourish:

1. Obtain Quick Hassle-free Financing Approvals

Holding good business credit is useful when applying for equipment financing. Having a good business credit score will improve your chances of getting approved for equipment financing, business lines of credit, or other business loans. A good business credit score will show the financing company that you can make repayments on time, make you eligible for lower interest rates, and help you get qualified for business loans quicker and easier.

2. Get Favorable Credit and Repayment Terms

Your business credit score isn’t just beneficial when you’re dealing with banks and lenders. A good business credit score can also help you get trade credit and secure better repayment terms with financing companies.

With a strong business credit score, they will see you as a reliable client and may offer you more flexible repayment structures. This is particularly useful when you need to purchase equipment or require equipment financing to grow your business. 

3. Makes it Easier to Acquire Future Equipment

As a young business, you might think equipment financing is out of your reach. But you might be surprised! Beacon Funding can help your business establish a new line of business credit. You can use this business credit history to look for additional financing options in the future.  

Some start-up owners still use personal credit for business-related purchases. When business owners mix their expenses, this could harm their personal credit if their business had to pay unforeseen expenses. Beacon Funding can help ease the burden on your personal credit by opening another line just for your business.

Start Building Your Business Credit with Beacon Funding Today

Every business must start somewhere. As a young business looking to establish business credit, you need an equipment lender that keeps your long-term goals in mind. Unlike traditional lenders, Beacon Funding is comfortable helping young businesses build their business credit.

For over three decades, Beacon Funding has helped small businesses grow and expand with equipment financing. If you’re interested in establishing or expanding your business credit history, contact us today, and we’ll help you.

Shreya Panchal

Shreya Panchal

P: 847.897.1763  |  EContact Me

As a content marketer, Shreya Panchal collaborates with Beacon Funding industry experts to write informative content on the commercial truck and decorated apparel industries.