Real Estate

Don’t mix up your business finances

One of the most common business mistakes many small business owners and entrepreneurs make is mixing 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 is that? I’m glad you asked.

In a word, credit. In two words, bad credit. This phenomenon usually manifests itself when the business owner requests a loan to buy a car, or even obtain a mortgage. That’s when the big red rubber stamp drops, rejected on his file. Or, when claim 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 credit mixing can often be 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 of the time it is because the small business owner used personal funds to launch or finance the expansion of his business. This may involve the use of personal credit cards, even taking out a home equity loan or home equity line of credit. This accolade pierces the corporate veil, exposing you personally to lawsuits. Money enters the business under 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 back home.

It’s best 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 have unfortunate consequences. If they would just take the time to research how to do it, it might save them until a complaint later on. But how does a small business do this?

Establish sound business finance practices from the start. Make sure that when you plan your entry into the small business field, you plan carefully and realistically. Start building your business credit profile right away. Set up your corporation (C or S-) or LLC (Limited Liability Company) correctly. 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 with the state and government. Make sure the address is a physical address and not a PO Box or UPS store. The following is your company phone number and fax number. Make sure this information is consistent and accurate. Make sure your business phone number is listed on the 411 National Directory Assistance with your physical business address. Create a business credit profile on your own or through Dun and Bradstreet.

Familiarize your business with vendors that are in your business area and get credit with them right away. Take a long-term view of what you need to continue operating at a high level. Next, you need to pay your suppliers promptly, even if it means skipping your own pay sometimes (yes, it does happen and you need to plan for it). However, you’d be surprised 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 multiple unsecured lines of credit, which is exactly what you want.

There are many pitfalls to starting or expanding a business, but mixing personal and business credit and finance is something that should be strongly avoided at all costs. And remember, be realistic about what you need, not what you want!

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