One of the most common business mistakes many small business owners and entrepreneurs make, is commingling their business and personal finances. The result can often be catastrophic. And for the most part, small business owners aren’t even aware of the implications. How so? Glad you asked.
In a word, credit. In two words, bad credit. This phenomenon usually manifests itself when the business owner applies for credit to buy a car, or even get a mortgage. That’s when the big, red, rubber stamp slaps down, rejected on his/her file. Or, when the dunning phone calls from business creditors become more frequent than calls from Aunt Sadie, who has nothing better to do than phone several times a day.
The result of all this commingling of credit can often result in two of the ugliest words in the English language bankruptcy, and lawsuit. Unfortunately, many small business owners don’t even see it coming.
How can something like this happen? Most often it’s because the small business owner used personal funds to either launch, or finance the expansion of their business. This can involve using personal credit cards, even taking out a Home Equity Loan or Home Equity Line of Credit. This commingling pierces the corporate veil, which opens you up personally to lawsuits. The money goes into the business on the premise that the business will pay it back. But, whoops! When sales go down and the business can’t afford to make the payments, unfortunately it all comes home to roost.
The best thing is not to get into this situation in the first place, but many small business owners and entrepreneurs are unaware of how they can establish a separate business credit profile. And this can often result in unfortunate consequences. If they only took the time to investigate how to do it, it could save them untold grief later on. But how does a small business do this?
Establish sound business financial practices from the outset. Make certain that when you plan your entrance into the small business arena, you do so both carefully, and realistically. Start establishing your business credit profile immediately. Set up your corporation (C or S-) or LLC (Limited Liability Company) properly. Next go to the IRS website and get your EIN for your business. This is like the social security number for your business.
Set up your business bank account, with the same address you used for your legal paperwork to the state and government. Make sure that address is a physical address and not a P.O. Box or UPS store. Next is your business phone number and fax. Make sure this information is consistent and accurate. Make sure your business phone number is listed in the 411 National Directory Assistance with your physical business address. Create a business credit profile on your own or through Dun and Bradstreet.
Get your business familiar with Vendors that are in your business arena and get credit with them right away. Take the long-term view as to what you need to keep operating at a high level. Next, you need to pay your vendors promptly very promptly, even if it means skipping your own salary at times (yes, this happens and you should plan for it). You’d be surprised, however, at how quickly your business credit profile will look rock-solid to a Business Loan Officer. And the better it looks, the better your chances of getting several unsecured lines of credit, which is exactly what you want.
There are many pit falls to starting or expanding a business, but commingling personal and business credit, and finances is one that should be strenuously avoided at all cost. And remember, be realistic about what you need not what you want!