Is Your Business Killing Your Credit?

Although he says he has a six-figure income, his balances on his credit cards are somewhere between $30,000 and $50,000, and he feels he has too much credit card debt. The reason he says he’s in the hole? “Business expenses.”

“He” is one of several respondents who participated in a recent Credit.com survey, Americans and Credit Card Debt, adding in the comments that the debt is at least partially due to his business. Others reported similar experiences, with the levels of debt they carry varying widely: “Most of it is for my business,” ($5,001 – $10,000); “Most is business related,” ($10,001 – 20,000); ”Started a small business,” ($20,001 – $30,000); “Used my credit card to fund a business venture” and “Money to start business,” ($30,001 – $50,000) were some additional responses.

Here are three ways that owners commonly find their business spills over into their personal credit.

Debt

Some business owners use their personal credit cards to charge business expenses. That’s fine, provided they don’t max out their cards or carry large balances. If that happens, the business debt can hurt their personal credit scores. In addition, what many business owners don’t realize is that some business credit cards automatically are reported on the owner’s personal credit reports and when that happens, they directly affect credit scores. After all, credit scoring models don’t distinguish between personal or business debts on credit reports. They all count.

That’s why it’s crucial, if you are a small business owner, to get your free annual credit reports to find out which accounts are showing up there. It’s also a good idea to get one of your credit scores (you get two for free with the Credit Report Card, a free tool that updates your credit profile monthly) to see how those accounts may impact your scores.

Cash Flow

Most entrepreneurs find their cash flow unpredictable at times. Whether it’s the seasonality of a business, a period of unexpected growth or stagnation, or a matter of clients or customers who take a while to pay, the money may not flow like clockwork. When those hiccups occur, owners may find themselves forgoing a paycheck, putting everyday expenses onto a credit card until funds come in, or even paying bills late.

And that means their personal credit may take a hit.

If you are a small business owner, it helps to know which business accounts appear on your personal credit reports. With that information, you can may be able to prioritize a little more strategically when money is tight. While all debts need to be paid, negotiating terms on ones that don’t regularly report may help you get through a rough patch and protect your personal credit reports. After all, one late payment can hurt your credit scores a lot.

Personal Guarantees

Many small business loans, including most Small Business Administration (SBA) loans, require principals in a business to provide personal guarantees. That means if the business fails, the lender or vendor can still try to collect directly from those individuals.

But that also means that when an account with a personal guarantee goes into default, that debt (or collection account) may wind up on the owner’s personal credit reports, and can affect their credit scores.

To help protect yourself, always read your contracts and pay attention to when a personal guarantee is required. If it is, ask whether it can be waived. If your business is well established, for example, the lender or vendor may be willing to work with you.