Should You Leverage Your Personal Credit Score For Your Business?
The process of building credit for your corporation or LLC can feel like a catch-22. On one hand, creditors will not extend underwriting unless your company has an established (and robust) credit history. That brings us to the question… how do they expect us to do that, when they won’t give us any to begin with?!
It’s the chicken or the egg conundrum and cracking the shell is never easy to do. Unless of course, you leverage your personal credit to cosign for your business. Should you do it or not? Well, consider the pros and cons and decide for yourself.
Makes getting a business credit card much easier – Did you know that in order to be approved for a business card using nothing more than your corporation/LLC’s credit history, typically you must have 2-5 million in annual sales? If you think I’m only talking about the high-end cards, think again. Even something as simple as the Office Depot store card has these requirements ($5 million annual sales and in business for at least 3 years, according to their website). However if you piggyback on your personal credit, you can get approved even if your company is brand spanking new.
Allows you to get better rates and terms – If your personal credit is excellent, then by piggybacking (albeit a card or loan) your business will get to reap the benefits of qualifying for the best interest rates and financing terms available. If you were relying solely on your company’s credit, it would take years or solid history to achieve that.
Fast tracks the credit building process – Perhaps the most compelling argument someone can make for leveraging personal credit is that it gives your company a jump start in credit building. The traditional way consists of establishing trade lines with suppliers, having them report to D&B, hoping those qualify you for some form of better credit, and then rinsing and repeating. By cosigning on loans and cards, your company will be able to have major forms of credit on file right away.
You are personally held 100% liable – As an entrepreneur, we all know success is far from guaranteed. So what happens if your business goes kaput? Well if you cosigned, that will mean you are personally 100% liable for the debt. It won’t be looked upon as any different than if you defaulted on a personal account.
Risk that might not be equally shared – If there are multiple partners/principals in the company but only you co-signed, then you have the most to lose if something goes wrong. This is why if you go into business with someone, it’s important not to be unequally yoked, if you will. If you each have equal ownership in the company, there’s no reason why you shouldn’t be equally held accountable. But even then it’s not always fair, because you may have great credit (a commitment to paying bills) and your partner may have bad credit (meaning he has less to loss, since his credit is already bad).
Negatively affecting your personal life – To say it bluntly, if your business fails and there are no personal guarantees, you lose your business and nothing more. However if it happens with personal guarantees involved, as mentioned above you will be held liable. Many people don’t realize how detrimental that it. If the business debt was more than you could afford to pay, it would end up in collections. That would mean your personal credit would be shot, which would obviously affect your ability to get approved for a car loan, mortgage, or even a credit card.
Before you apply for a business credit card or loan with a personal guarantee, you need to carefully weigh the pros and cons. This especially holds true if you have a family, since it won’t just be yourself on the line, but also their lifestyles (assuming you support them). Using your personal credit is not a decision that should be taken lightly, nor should it be made hastily.