Jul 25, 2013

Business Owners Beware of Personal Credit Checks

credit-reportFor small business owners, having a company credit card can make daily operations much easier. These cards can make paying suppliers and other business partners a much simpler process, and can help with cash flow when big purchases are needed or if economic conditions get tough. Although company credit cards can help your business in a number of situations, as a business owner you should be wary of cards which require personal credit checks. If your company does not have substantial business credit, these companies may want you to co-sign on the card application. These types of cards may not only hold you personally responsible for the debts of the business, but in the case of default on their payment, can drag your credit rating down with your business.

Here are three reasons why you should watch out for personal credit checks when it comes to your company’s credit cards:

1. It Can Affect Your Personal Debt Ratio

Business credit cards which utilize personal credit checks can skew your personal debt ratio. When a consumer applies to a lender for any type of credit (such as a personal, auto or home loan) the lender analyzes how much debt the applicant has compared to their income. When a business credit card reports to your credit profile, its balance will negatively affect your debt ratio, making it more difficult for you to obtain a loan at desirable interest rates. In addition to your debt ratio, lenders also pay attention to the amount of your available credit that you have in use. Often times, company credit cards can carry a large balance, one which could likely make you appear to be using too much of your available personal credit limit.

2. Difficult Times For Your Business Can Increase Personal Financial Problems

Another disadvantage of personal credit checks when applying for business cards is that financial troubles in your company are more likely to spill over to your personal life. As a company owner, you’ll likely be affected personally if you run into a tough period with your company; having your company credit cards linked to your personal rating will only magnify the problem. If you are having cash flow issues and miss a payment on your business card, the negative incident will be recorded to your personal profile, dragging your credit score down with it. For most small business owners, the best business credit cards will be ones which do not post to personal credit profiles.

3. Default Will Bring Your Credit Rating Down

The failure of a small business is something that no entrepreneur wants to think about, but is a situation that needs to be planned for, regardless. If you were forced to abandon your business venture, how would the company’s financial problems hurt you? If your company’s credit cards are linked to your personal credit, you will still be held responsible for the debt. Failure to pay will cause overdue notices to be posted to your profile indefinitely, and remain there for seven years. Most small business owners invest a significant portion of their assets into starting their company – when these businesses fail, being personally responsible for business debts will only add to the financial burden.

There are a number of lenders out there that provide credit to small businesses. If your company doesn’t have substantial assets or business credit to satisfy their requirements, some of these companies may ask you to personally secure the business card. By agreeing to a personal credit check, you are likely opening yourself up to a number of negative repercussions to your personal credit profile. This is not just damaging to you in the event your company has financial problems – even if your company is operating successfully the added credit on your personal profile can bring your score down. The best bet, for any savvy small business owner, is to seek out business credit cards that do not perform personal credit checks.

Chris-Mettler+Chris Mettler guest posts on a number of finance and business blogs like Lendio.com. His blog  is comparewallet.com, where he shares a number of tips regarding credit cards, and personal and business finance.

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