Having your own business and working for yourself is the American dream. Though plenty of us have ideas and big plans to one day live out our entrepreneurial dreams many of us don’t have the funds necessary to make the first move in getting things started. So you like most people have probably thought, well why don’t I just borrow the money to get this business started? Well, starting a business on credit comes with some pros and cons and here they are.
Pros:
Starting a business and funding it with credit allows you to get things started faster because you don’t have to use cash for large startup expenses.
You can pay these costs off over time as money starts to come in from the business.
You are likely using your personal credit at this stage of business so as long as you are paying on the credit in a timely manner you are helping your credit score.
You can apply for business credit to get funds for your start-up. This will help you establish business credit so you won’t need to use your personal credit in the future.
Cons:
Because you are just getting started in business you will have to use your personal credit to do this. This adds more debt to your personal credit profile and can lower your personal score and increase your debt to income ratio which will affect your personal finances.
These effects aren’t obvious at first but let’s say that your car breaks down and you need to get a new car loan. Since you used credit to start your business you now have loan, for example, with a $500 payment that shows up on your personal credit report. This payment will be deducted from your income when they calculate your debt to income ratio so you can get declined for the car you need because you have that business loan.
If your business isn’t successful or isn’t profitable for some time it can become hard to make payments on that credit account. These late payments will damage your personal score since the credit account will be attached to your personal credit file through a personal guarantee the lender makes you sign to obtain that credit.
Because credit for a new business is normally tied to your personal credit, it will be hard for you to apply for any extra credit if you owe high balances. So you can’t use credit again for a plan B if the funds you already used didn’t get the job done.
As you can see using credit to start your business comes with some good and bad. Having those funds can get you started fast but if you didn’t think about how fast you will start to make that money back it could lead to some problems. The excitement of living one’s dream can lead to missed steps and lack of deep thought into the strategy needed to succeed. While starting a new business can be exciting it is important to plan your steps carefully to avoid any pitfalls from the startup funding you use.
You can check your credit score here with identity IQ for $1 if you want to see where you stand before you try to get a loan for your business.
William Frazier
NACC Certified Credit Counsilor
Clean Slate Credit
334-430-5296
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