Mixing Business and Personal Credit Can Hurt Your Credit Score

One of the core pieces of advice that business owners should follow is not to mix business finances with personal finances. The reasons for heeding this advice are many. Commingling business and personal finances can complicate record keeping and tax filing.

It can also lead to legal problems should your business face any liability that could risk your personal assets. The problems of commingling are further compounded if you develop the bad habit of carrying business balances on your personal credit cards. Quite simply, it can sink your credit score, making it very difficult to get financing for your business.

Factors That Affect Your Credit Score

There is no mystery as to what factors can adversely affect your credit score. Certainly, missed or late payments are a primary factor. Because this is often the result of amassing more debt than your cash flow can support, the next most important factor that credit rating agencies consider is the size of your balances on each credit card.

The key determinant is the size of the balance in relation to the available credit. Even if you make your payments on time, carrying large balances will cost you points on your credit score.

Preserving Your Personal Credit

It is understandable why new business owners would use personal lines of credit to finance business expenditures. In a young business, cash flow is usually an issue, and it’s too soon to be able to establish a line of credit for the business. But once the balances are run up on your personal credit cards, it won’t be easy to qualify for additional personal credit, much less business credit.New business owners need to manage their credit so that they are not cut off from all forms of financing.

Credit card expenditures must be weighed carefully against the prospects of generating a sufficient return on the money to repay the debt. The general rule for businesses, and individuals for that matter, is that if it takes a credit card to cover the expenditure, it is probably not affordable, and the purchase should be delayed. If there is a possibility that the expenditure will not be repaid within a couple of months, then you should consider a smaller purchase.If a significant expenditure is required, other financing methods should be considered, such as a personal loan from a relative or a collateralized loan such as a home equity line of credit.

Building Credit for Your Business

It is crucial for a business to qualify for its own credit. While this is challenging for a new business, steps can be taken early on that could result in more immediate consideration by a bank. Any business can work towards developing a business credit score. Paydex, a part of Dunn and Bradstreet, is a system similar to individual credit scoring.

The easiest route to building a Paydex score is to apply for an ID number with them and then open up some small lines of credit with office suppliers such as Staples. These suppliers report directly to Paydex on the payment history of the business. You can build a solid Paydex score simply by keeping your payments current.

Having a good business credit score does not mean you can let your personal credit score slide. Your business creditworthiness depends on both your business score and your personal score. The best credit management practice is keeping your balances low on business and personal credit lines.