You may already be thinking, “I don’t plan to have a sole proprietorship… I’m convinced that I need to form an entity.” But when will you take action? If you wait 30 days or longer, do you realize the negative impact that may have on your business? Although it’s not impossible for a lawsuit to pop up in that short period, a MUCH bigger (and disturbingly common) mistake lurks at this important business start-up phase…
Using your personal credit cards to finance the start-up of your business is the most widespread mistake made. Added to the folly of operating as a sole proprietorship with a “let’s see how we do first before we incorporate” mentality, it’s a recipe for disaster. Here’s why:
Financing your business with your personal credit (credit cards, home equity line of credit, etc.) negatively affects your “revolving debt ratio.” That ratio is a major factor in your new corporation or LLC’s ability to obtain a business credit card at the start,,, and later, a business line of credit.
Why is this so important? The number one reason business owners fail, especially during the first six months, is lack of cash flow. That’s when the folly of overestimating revenue and underestimating expenses rears its ugly head. And for most small business owners, that behavior is as predictable as the sun.
FAST BUSINESS CREDIT is one of the few, if not the only company that literally “Cracked the Bank’s Code” on business lines of credit for you. We spent more than four months going back and forth with a major bank to figure out exactly how they make their decisions as to who gets those valuable lines of credit, how much… and who does not.
Factors such as the “liquid credit score,” the risk category of your business, gross revenues, your personal credit score, derogatories, and your revolving debt are all taken into consideration.
Here’s the bottom line: If you’re starting your business by nearly or completely maxing out your credit cards, the bank will ignore you. Even with a 700 personal credit score, if your revolving debt is close to 90% maxed out, that sends the bank a very clear message that you cannot manage your personal debt. Why give you money to start a business? Basically, you’re on your own financially.
Don’t be misled by TV or Internet ads about “corporate credit,” either. Usually, they refer to “trade lines of credit,” which doesn’t give you actual cash for you to use in your business as you choose. Now, if you’re building homes or have more than 30 employees, developing trade credit can be important — but it’s still not cash. You can’t use trade credit to make payroll, nor to spend on pay-for-click advertising or any of the many other strategies you need to start quickly and gain that all-important competitive edge.
Want a simple solution?
1. STOP using YOUR PERSONAL CREDIT CARDS ASAP!
3. Open a BUSINESS CREDIT CARD and use that ONLY for your business expenses. Yes, it is personally guaranteed, but it will NOT negatively impact your personal revolving debt ratio.
That’s key advice as your business gets started. Remember, when your corporation or LLC applies for a business line of credit, half of the bank’s formula in determining eligibility is your personal credit score — and most importantly, the revolving debt ratio.
About The Author: Scott Letourneau is the CEO of Fast Business Credit, Inc. When it comes to securing cash and vendor lines of credit and avoiding costly mistakes his company is the authority. For further assistance regarding the development of business credit go to http://www.FastBusinessCredit.com or call FBC at 1-888-313-6333 or 702-977-5246.