By Dale Gibler on December 04, 2021
Your ultimate guide to avoiding the most common mistakes business make when seeking financing.
How Much Are You Willing to Risk For Your Business?
Avoid these chilling and all too probable consequences. Here are the nine most devastating financial mistakes entrepreneurs make. These are critical errors. They can bury your business, smother you in personal debt, and destroy your financial future.
Our business financing experts have helped thousands of entrepreneurs like you avoid these expensive blunders while building solid, valuable corporate credit. And along with it, the business of their dreams! Follow our time-tested ways to avoid these nine entrepreneurial dream killers. And you’ll be on your way to a more secure, satisfying, and financially rewarding future.
Devastating Mistake #9 Using Personal Credit to Finance Your Business
This is the hands-down biggest and most common mistake entrepreneurs make. It is using personal credit to finance its businesses. Common examples include:
Paying for business expenses with your personal credit cards
Taking out personal loans to finance your business expenses
If you’ve used one or more of these financing methods to fund your entrepreneurial ventures, I’m not surprised. Shockingly, many business startup experts recommend these methods for funding new businesses.
This advice is meant well. But it is still dangerous. The reason for not using your personal credit for business purposes is simple: You WILL destroy your personal credit. It’s inevitable.**
By using your valuable personal credit for business expenses, you run the risk of:
Lowering your personal credit score. When you personally guarantee business-related financing, the lender will want a personal credit check.
With every inquiry into your credit history, your personal credit score takes a hit. The lower your score drops, the harder it is to get financing, especially financing with the most favorable terms.
Reducing the amount of credit available for personal use. The more credit you have personally guaranteed for your business, the higher your debt-to-income ratio soars. And if you need loans for personal use, you will get less from lenders. Signing a loan for your business could keep you from getting a mortgage on the new house you plan to buy a year from now.
Losing everything. When you use your personal resources or credit to finance a business, you chain your financial security to your company’s success. If the company fails, you are be left holding the bag. And your personal finances will sink along with your business. You’ll never recoup the ‘loan’ you took from your retirement account to get your business launched. Creditors will be calling you for payment. And if things get bad enough, you may have to declare bankruptcy.
To protect your financial security, don’t use your personal credit to finance your business activities. Instead, secure credit in your company’s name. You do not have to risk your personal assets or lower your personal credit score. And you will eventually be able to get credit without a personal guarantee.
Devastating Mistake #8 Putting Personal Assets at Risk
Each time you pledge personal assets for any type of credit for your business, you jeopardize your personal belongings. These include savings and investment accounts, your car, and even your home. If your business can’t pay off its debt, the bank will come looking for you to make good on the loan.
A sole proprietorship is most susceptible to this risk. You can build business credit as a sole proprietor. But you will be completely liable for all personal and corporate debt. Your credit history only comes from activity associated with your social security number. This is because you will not have a corporate tax ID number. As a sole proprietor, you also have no legal means to separate corporate and personal credit.
The best way to protect your personal assets is to incorporate your business. You’ll shield yourself from personal liability for the company’s debts and often will also reduce your tax burden.
Devastating Mistake #7 Contaminating Your Credit
When people marry, they vow to share their lives. For some good-hearted but financially naïve couples, this means sharing personal credit.
Unfortunately, adding your spouse to your credit isn’t a show of undying loyalty and devotion. It’s credit file contamination – an almost unforgivable sin if you’re a business owner.
When you initiate joint credit, your spouse’s credit history becomes part of your credit file. If your spouse misses a payment, the delinquency affects your credit.
The matter is complicated further if you haven’t separated personal credit from company credit. Credit file contamination from a spouse’s credit history could keep you from achieving business goals. Because it will keep you from securing the financing necessary to grow your company.
Avoid credit file contamination. Keep your credit history completely separate from your spouse’s. If your spouse ruins their credit, then you’ll still have a good credit history to support your family and business.
Devastating Mistake #6 Not Paying Your Bills on Time, 100% of the Time
You misplaced your credit card bill and sent in payment a few days late. It happens to the best of us, right? Maybe so. But as an entrepreneur, you can’t afford even a single late payment, whether business or personal.
Your credit file is a complete history of your credit activity. Not paying your bills on time can ruin your credit file. Single delinquency can be held against you for years and be used to prevent extending existing credit or denying new credit. And this can make or break your ability to finance the launch, operation, or growth of your company.
There are two ways to protect yourself from this critical mistake. The first, obviously, is to make sure to pay your bills on time. Second, keep your personal credit separate from your corporate credit. That way, problems with a personal credit history will not affect corporate credit. But if you fail to separate your corporate and personal credit, problems with your personal credit file could directly affect your ability to build your corporate credit and your business.
Devastating Mistake #5 Using Your Family’s Money
When you use a personal credit card for business, you instantly slash the amount of credit available. This is your personal credit to get what you and your family need and want. Many Americans see credit cards as a financial cushion to carry them through emergencies. This includes an illness making it impossible to work.
Hence wasting your credit on business expenses weakens your safety net.
Still, many entrepreneurs ignore the dramatic consequences of this dangerous practice:
They buy business-related items with their personal credit cards hoping to pay themselves back one day.
They get other personal credit cards, leases, loans, and lines of credit and then use them for business expenses.
Once they exhaust their borrowing limits, they persuade family members to use their credit to keep the business afloat.
Be forewarned. If you convince your family to finance your business, you’re just digging a deeper hole for them to crawl out of. If your business fails, it could wipe out your family financially. This is as 95% of businesses do in the first five years, according to the Small Business Administration.
Don’t ask family members to use their personal credit to invest in your business. As we discussed in Mistake #9, using your personal credit 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. Keep everyone’s personal credit strictly separate from your company’s corporate credit.
Devastating Mistake #4 Not Incorporating and Building Corporate Credit the Right Way
Many business owners are unaware of the value of incorporation. Even fewer understand the essential steps necessary to build corporate credit. This is credit where they can take full advantage of their entrepreneurial status. Incorporation makes your business entity separate fr
om you, the business owner. The business becomes a separate entity with its own liability. Incorporation separates your business assets from your personal assets. If sues your company, they cannot touch your house, car, or anything else owned by you or your family.
But removing personal liability for company debts and actions isn’t the only reason to incorporate. Let’s face it. You are in business to make money. To make a profit and sustain your business, you need capital – in the right place, at the right time – to help your business grow. By incorporating your business, your business can start establishing corporate credit. This will ultimately provide the funds you need to grow your business. And you can one day get to the point where your business can get funding without a personal guarantee. Keep in mind, this takes time to do.
But incorporating doesn’t automatically qualify you for all the corporate credit you need. And it does not qualify you for the best type of corporate credit. Your goal sh
ould be to secure cash. This is not the line of credit tied to particular stores or vendors. It should be where you do not need to offer a personal guarantee. To secure this “Holy Grail” of corporate credit, you must follow a well-defined, step-by-step system. This is to build your corporate credit history and business credit score.
Some of the preliminary steps to excellent corporate credit include incorporating and maintaining a physical office. They also include getting a local phone number and a 411 listing. And get a business license and have a business with real revenue.
These steps pave the way for building your credit score with business credit bureaus. Follow those preliminary steps and provide the bureaus with the information they want. And go through our Corporate Credit Builder Program.
Then you will be ready to approach the few lenders who will give you a cash line of credit with no personal guarantee. These are a few lenders which will help you keep your business and personal assets separate. And they will give you the cash you need to grow your business.
Devastating Mistake #3 Rushing the Process For Building Corporate Credit
Corporate credit can be an invaluable tool as you build your wealth. This is because it gives you the flexibility to invest money to help build your business.
It takes time and patience to build wealth. And it also takes time and patience to build corporate credit to get cash from lenders with no personal guarantee. Incorporating your business is just the start of the process.
You can build corporate credit to where you can get cash without a personal guarantee. The industry standard says this takes two to three years. We have streamlined the credit-building process. So you can get the corporate credit you need in as little as one month (as long as you meet the criteria. But if you don’t qualify, don’t worry, we will help you understand what changes you must make to help you qualify). Then follow the steps to position your company to qualify for no personal guarantee forms of credit.
Devastating Mistake #2 Not Following Up on the Credit Building Process
Once they start following the prescribed process for building corporate credit, many entrepreneurs simply don’t do enough follow-up work. But if you don’t keep track of your progress while building excellent corporate credit, you may miss key elements. These could make the difference between getting the cash line of credit you need or getting a denial.
t is always a good idea to delegate, especially if you are busy. But you have to be careful about which kind of work you delegate. Work that directly affects the growth of your business and your wealth deserves your personal attention.
Devastating Mistake #1 Not Recognizing Opportunity Costs
At the first sign of profits or the first influx of credit, many business owners spend on material goods. This can be more than they have – or even more than they will make. Lured by the luxury car or exotic vacation they’ve lusted after for years, they ignore long-term business goals. Instead, they go for temporary and immediate gratification.
But if you want to achieve your long-term business goals, you cannot do this. Instead, only leverage corporate credit and profits to create greater gains for your business. Don’t try to figure out how much profit you can take out of the business. Instead, learn how to invest earnings to deliver greater returns for your business.
This is not, by any means, a comprehensive list of all the mistakes entrepreneurs make when building corporate credit. But if you address these costly and dangerous errors, you will be on your way to building a safe, secure, and financially sound business. It can be the
the business you always dreamed of!
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