If you have the entrepreneurial spirit but don’t have the cash to start a business, you may have considered using your personal line of credit (e.g. credit cards, home equity line of credit) to fast start your company. This may seem like a good idea if you want to get going right away, but it’s important to consider the consequences before you start spending.
At all costs, avoid using personal credit to pay for business expenses.
If you’re new to business, chances are likely that you’ll underestimate the actual cost to start a business and find yourself deep in debt and broke within months. The number one reason why most new businesses fail is lack of cash flow. You’ve probably heard the adage, “If you fail to plan, you plan to fail.”
Here is where most people fail to plan: They wait until they desperately need cash before applying for credit. The truth is that you’ll increase your chances of getting a line of business credit if you apply for it before you need it.
It’s imperative to keep personal credit and business credit separate. If your business has some credit bumps and bruises along the way, you’ll want to ensure that it won’t affect your personal line of credit. If you max out your personal credit cards for business expenses, you won’t have any credit left to take care of your daily needs. That’s why you want to establish two separate lines of credit.
The other reason for keeping your revolving debt ratio low is that when you apply for a business line of credit, half of the formula for determining your eligibility for a corporation or LLC line of credit is based on your personal credit score and your personal revolving debt ratio. When you apply for a business credit card after you form the LLC or corporation, it is 95% of the formula. If your personal credit is maxed out, the bank will assume that you don’t have the cash flow to pay back your loan.
Use this three-step formula to start your business now:
1. Stop using your personal credit cards. Start paying down the balances and using cash for your daily needs. People who max out their credit cards are usually strapped for cash, and people who are strapped for cash are considered high risk to lenders. The ideal ratio for your personal credit cards is 5-20% debt to the total limit available.
2. Form a business entity that is separate from your personal expenses. Don’t form a sole proprietorship. Instead, form a corporation or LLC. This will protect your personal assets from business liens, lawsuits, or creditors.
3. Apply for a business credit card. Again, keeping your personal line of credit separate from your business line of credit will protect your personal assets.
This three-step formula will ensure that you get the cash flow you need to operate your business, and it will help you get your business off to a fast start. The longer you wait to initiate the process, the less likely you’ll see your dreams come to fruition. Start a business with a plan, and you’ll be on the right track to success.
For more information on accessing credit so you can fast start your business read on! How to get business credit
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.