“How Much Are You Willing to Risk For Your Business?”
Entrepreneurs enjoy a greater level of risk than the average person. Entrepreneurs typically make one or more financially devastating mistakes when financing the launch, operation, and/or growth of their businesses. In most cases, they don’t realize that they’re making a mistake.
Even when they do realize they’re making a mistake, they think that the consequences will be a minor annoyance, until one day, they can’t qualify for a mortgage or they can’t get the financing offered on the new car they’re buying. As an attorney, I have assisted Business owners to declare bankruptcy because their minor annoyance threatened their financial lives.
I have assembled a list of the nine most devastating financial mistakes entrepreneurs make. These are critical errors that can bury your business, smother you in personal debt, and destroy your financial future.
The business-financing experts at Valle de Oro Financial Services, Inc. have helped entrepreneurs avoid these expensive blunders while building solid, valuable corporate credit and the business of their dreams. Avoiding these nine entrepreneurial devastating mistakes, 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
The biggest and most common mistake entrepreneurs make is using personal credit to finance their businesses. Common examples include paying for business expenses with personal credit cards and obtaining personal loans to finance your business expenses.
Personal credit will be destroyed if used for business purposes.Business owners who use valuable personal credit for business expenses run the risk of lowering their personal credit score. The lender will require a personal credit check when a personal guarantee is provided in business related financing. Personal credit score is affected every time an inquiry is made in credit history. It becomes more difficult to secure financing with the most favorable terms with a low credit score.
• Reducing the amount of credit available for personal use. The more credit personally guaranteed for your business, the higher the debt-to-income ratio becomes and the less that lenders will be willing to provide for personal use. A business loan could prevent you from getting a mortgage if the business loan was made using personal cedit.
• Losing everything. The use of personal resources or credit to finance a business, shackles your financial security to the company’s success. If the company fails, personal finances will sink along with the business. Creditors will be calling you for payment.
Don’t use personal credit to finance your business activities. Instead, take action to secure credit in your company’s name WITHOUT Risking Your Personal Assets, Lowering Your PersonalCredit Score, and eventually, without a personal guarantee.
Devastating Mistake #8
Putting personal assets at risk
Each time personal assets are pledged for any type of credit extended to the business,personal belongings are placed into jeapardy. If the business can’t pay off its debt, the bank will look to the owner to pay the loan.
A business entity established as a sole proprietorship is most susceptible to this risk. A sole proprietor is completely liable for all personal and corporate debt. Credit history will be based solely on activity associated with the owner's social security number because there is no corporate tax ID number. As a sole proprietor, there is no legal means for separating 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 typically will also reduce your tax burden.
Devastating Mistake #7
Contaminating your credit
When people marry, they vow to share their lives. Many couples share their personal credit. Unfortunately, adding a spouse is credit file contamination and devastating to a business owner. Once joint credit is initiated a spouse’s credit history becomes part of the credit file. If a spouse misses a payment, the delinquency affects the other's credit.The matter becomes complicated further if personal credit is not separated from the company’s corporate credit. Credit file contamination created by a spouse’s credit history could prevent one from achieving business goals because it prevents securing the financing necessary to grow the company.
Keep credit history completely separate from a spouse’s history to avoid credit file contamination. If a spouse ruins his or her credit, then the other may have a good credit history to support the family, as well as the business.
Devastating Mistake #6
Not paying your bills on time … 100% of the time
An entrepreneur must not have a single late business or personal payment. A credit file is a complete history of credit activity. The failure to pay bills timely can ruin a credit file. A single delinquency can be used to constrict the extension of existing credit or deny new credit which can detrimentally affect the ability to finance the launch, operation or growth of a company.
There are two things you should do to protect yourself from this critical mistake. The first is to ensure that bills are paid promptly. Second, keep personal credit separate from corporate credit. That way, problems with a personal credit history will have no bearing on corporate credit.
If all the necessary steps to separate corporate and personal credit are not made, problems with a personal credit file could directly affect the ability to build corporate credit and a business.
Devastating Mistake #5
Using your family’s money
Using personal credit cards to buy business items instantly slashes the amount of credit available to get the things wanted and needed by a family. Many many regard credit cards as the financial cushion for emergencies. 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 obtain other personal credit cards, leases, loans and lines of credit and then use them for business expenses.
Once their borrowing limits are exhausted they persuade their spouses or other family members to continue financing the business through credit cards. Convincing a family member to finance a business, can have a devastating effect on the family member. Especially since, according to the Small Business Administration, 95% of businesses fail in the first five years.
Don’t ask family members to use their personal credit to invest in a business. As we discussed in Mistake #9, using your personal credit to pay for business expenses is a strategic error. If it doesn’t make sense to the business owner, it makes even less sense for family members. Keep everyone’s personal credit strictly separated from the company’s corporate credit.
Devastating Mistake #4
Not setting up a corporation and
building corporate credit – the right way
Many business owners are unaware of the value of incorporation. Even fewer understand the essential steps necessary for building the kind of corporate credit that will enable them to take full advantage of their entrepreneurial status.
Incorporation makes the business entity separate from the business owner with its own liability. Incorporation separates the business assets from personal assets. If someone decides to sue your company, they cannot touch your house, car, or anything else owned by you or your family.
Eliminating your personal liability for the company’s debts and actions isn’t the only reason to incorporate a business. By incorporating a business, business is enabled to begin establishing corporate credit, which will ultimately provide the funds needed to grow the business without a personal guarantee. This takes time to accomplish.
Incorporating a business doesn’t automatically qualify it for all the corporate credit needed, much less the best type of corporate credit. The goal should be to secure cash– not lines of credit that are tied to particular stores or vendors – for which you do not need to offer a personal guarantee. To secure this type of corporate credit, you need to follow a well-defined, step-by-step system to build your corporate credit history and business credit score.
Some of the preliminary steps every entrepreneur needs to take to secure excellent corporate credit include incorporating your business, maintaining a physical office, obtain a local phone number and a 411 listing, and get a business license and have a business that has real revenue.
These steps begin to pave the way for building your credit score with business credit bureaus. After those preliminary steps are followed and provide the bureaus with the information they require, and go through Valle de Oro Financial Services, Inc. Corporate Credit Builder Program, lenders will provide a cash line of credit without the need of a personal guarantee. In other words, those few lenders will help you keep your business and personal assets separate AND 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 because it provides the flexibility to invest money in ways to build a business.
It takes time and patience to build the corporate credit that enables you to get cash from lenders without a personal guarantee. Incorporating a business is just the start of the process.
The industry standard for building corporate credit to the point where you can secure cash without a personal guarantee is two to three years. Valle de Oro Financial Services, Inc. has streamlined its credit-building process so that the corporate credit can be obtained in half the time (as long as you meet the criteria, if you don’t qualify, don’t worry, we will help you understand what changes need to be made in order to help you qualify). And 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 the prescribed process for building corporate credit is begun many entrepreneurs simply don’t do enough follow-up work. But if you don’t keep track of your progress during the process of building excellent corporate credit, you may miss key elements that could make the difference between getting the cash line of credit you need … or being denied.
It is always a good idea to delegate, especially if you are busy. But you have to be careful as to which kind of work you delegate. The 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 more than they have, or even more than they will make, on material goods. Luxury cars or exotic vacations cause long-term business goals to be ignored in favor of temporary and immediate gratification.
To achieve long-term business goals, recognize that corporate credit and profits should only be leveraged to create greater gains for the business. Instead of planning how much profit you can take out of the business, seek ways to invest the earnings so that it will deliver greater returns for the business.
This is not, by any means, a comprehensive list of all the mistakes entrepreneurs make when it comes to 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.
Valle de Oro Financial Services Inc. shows entrepreneurs and business owners how to build Business Credit that enables them to apply for cash to finance their businesses … both with and without a personal guarantee. Valle de Oro Financial comprehensive Credit Building Program, is a proven, step-by-step program for separating personal credit from corporate credit and leveraging Business Credit for additional financing opportunities.