When you use your personal credit card to buy business items, you instantly slash the amount of credit you have available to get the things you and your family need and want. If you’re like most people, you regard your credit cards as the financial cushion that will carry you through emergencies—such as an illness that makes it impossible to work, or catastrophic house repairs. It’s important to realize that wasting your credit on business expenses weakens your ability to use your personal credit as a safety net.
Still, many entrepreneurs ignore the dramatic consequences of this dangerous practice:
And, once their borrowing limits are maxed out … they persuade their spouses or other family members into using their credit to continue financing the business.
Be forewarned: if you convince your family members to finance your business, you’re just digging a deeper hole for your family to crawl out of. If your business fails your family could be wiped out financially.
Don’t ask family members to use their personal credit to invest in your business. Using your personal credit to pay for business expenses is a strategic error. And if it doesn’t make sense for you, the business owner, it makes even less sense for family members. Our advice: keep everyone’s personal credit strictly separated from your company’s corporate credit.
If you need help incorporating or building good business credit, click here for a complimentary business credit consultation and to obtain our free e-Book, "Unlimited Business Financing—Without a Personal Guarantee”—a step-by-step process for building a business credit asset.
Keith L. says:
Holy cow! I couldn't imagine asking family members to do this. Personally I find it wrong on so many levels unless of course the family member has a stake in the business or is your partner.
1) If you and your business can't make it on your own, don't drag the family into it with you. Businesses come and go but family is forever so don't risk lifelong relationships with what could be a potential disaster!
2) Don't put your company in a position to be cash strapped. In good times, setup cash reserves to get through lean times. Don't use credit to float you. Use credit to buy capital equipment or real estate. However credit cards are a great way to pay for operating expenses and computers and items that you can repay in full at the end of month. We get several thousand dollars back each year using cash back credit cards for items we pay off in the same month we purchase them. Don't even think about using a credit card if you can't pay it back without accruing interest.
3) Don't be afraid to let it go. Businesses fail. It is a part of life. Don't hang on to the sinking ship for so long that it wrecks your financial life. The impact of a failed business will hang around a lot longer if you dig too deep a hole. Set a max amount of debt that you will get into and don't go 1 penny over.
4) Watch the money before the disaster is inevitable. Set standards and metrics that keep you cash reserves at a certain level. Determine critical levels of production and financial health that when crossed indicate that it is imperative to cut staff or overhead expenses and act on those indicators. Sometimes in order to keep the ship from sinking you have to make tough choices and cut valued employees or "luxury" perks. Without doing so you could sink the ship for all involved (including yourself). In these times, operating a business can be a messy business.
Keith Larochelle, CFO
Submitted Feb 24, 2010 11:57 AM
Eric C. says:
Building business credit and using business cards for purchases is vital. I have a small moving business. Right before the credit crunch I stupidly decided to invest in my business and expand it. Once the crisis came I started getting less and less clients to the point where I wasn't able to cover the expansion loans I had taken. I want through a debt settlement and I'm slowly recovering. If a record like that was on my personal credit file I wouldn't be able to get credit for a long time!
Submitted Dec 27, 2011 4:18 PM
You've read about how to better understand money, now do something about it.
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