All businesses whether large or small usually rely on some form of credit to help get things done. In today’s business environment establishing your credit is more important than ever. What you may not know is the financial risk you may be personally taking when you sign on the dotted line.
All businesses need credit. And the process of building that credit starts in the very beginning of your businesses journey. There are different types of credit you’ll develop over the life of your business. Some of the forms of business credit include secured credit lines with your bank, unsecured credit cards, vehicle leases or loans, supplier credit lines, and equipment leases. Each of these forms of credit will come with a myriad of documents for you to sign. And here is where your problems may begin.
You see your business whether you realize it or not becomes a living breathing entity in its own right. If it has been incorporated it is issued an EIN or employer identification number. As a sole proprietorship your social security number would be used in which case your business is an extension of you. As a partnership your business is an extension of two people. And just like you needed to start somewhere to build your credit so to will you business.
They say that one advantage of incorporating your business is that you are given protection against creditors should the business default on a debt. Well this is true to some extent but it’s not really the whole story. You see sometimes your business needs a little help in developing its own credit history. Because just like you had to start somewhere it starts with nothing and has to earn its own credit rating. This is where the problems begin.
Think about when you made your very first significant purchase in life. Whatever it was you might have needed a cosigner because you didn’t have any credit yet. Well because your business doesn’t have any credit or it’s not well developed yet lenders want a cosigner for your business purchases too. They want someone to guarantee that they will be paid.
No big deal right! Hey your business is going to be a huge success you can already taste it! And your business needs things. So sure you’ll cosign, where’s a pen? Not so fast. Because once you sign those papers you are now responsible for that debt personally and just because your business is a corporation doesn’t mean you’ll be protected if something goes wrong.
Even if your business is forced to declare bankruptcy the creditors can come after you if you have given your personal guarantee. And any loan that you take out whether it is an auto loan or a credit card that is unsecured the creditor will want that guarantee before they will give your business the loan. When they consider whether to give your company credit they are going to look at your credit history just as carefully as they will look at your company’s.
This is why you need to carefully consider every business decision you make that involves credit. Because it may not be just your businesses credit and finances you are risking but your own. If your businesses creditors are forced to come after you then personal bankruptcy protection may just as well be in your future too. And none of us wants to have to go that route.
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