We challenge you to start, grow, and run your small business without using your personal credit cards. A fact of life for a small business owner includes the likely co-mingling of personal credit with your business activity. As we have written previously, banks just are not lending to small businesses any longer.What this means to a small business cannot be stressed enough…if you do not have access to funding, you are going to be in trouble.

It makes sense to plan the grow cycle of your business ahead of time so that you have an actual plan. For example, if you manufacture a product, perhaps you can use your savings to build the initial products. But, have you thought about what happens when you close you first good wholesale account? Likely, a large retail partner will require a near immediate response and shipment time. This means you need to have the items already in inventory before the purchase order is generated. And if the retailer turns your products, the order frequency can easily get out in front of you beyond your capacity. You see where this is going, right? Financing is a must.

For most small businesses, the steps are savings > credit cards > bank loans > equity sale.

Using your personal credit is your choice to make. We have done it many times. Our advice is be careful. What will happen is that your credit scoring will suffer. Even the most aggressive managing of the flow of funds will not be enough to keep your scoring intact over the growth cycle of a growing business. At some point, you will learn about universal default. Buried in the accordian pamphlet that credit card companies send you are the terms and conditions of use for your credit card. Read this carefully. Banks reserve the right to enter your account into a default status for nearly any number of reasons. One reason is too high of a utilization of your credit limit. Doesn’t matter if you pay on time every month. They can and will default you. Once one card defaults you, the others will follow shortly thereafter. That brilliant idea you thought of, you know the one, using zero interest credit cards to finance your business. Yeah that one. Well, that $30,000 of debt just went from zero interest to 20%. Overnight. Your now have $500 per month of interest payments to deal with. Try going to a bank with a default status on your credit profile and see what happens.

That is why we recommend keeping business expenses off your personal scoring. Try your best to avoid using personal credit cards. Never use a home equity line of credit. Putting your home on the line is an inappropriate use of your primary asset. Remember to always push the risk out to the bank and never over guarantee a loan with a sizeable asset.

We recommend that your financing cycle be changed to savings > bank loans. Period. Savings, because you need to exhibit you have ‘skin in the game’ to any bank underwriter or equity investor. And bank loans because it is the appropriate course of action. Yes, credit cards are easier to use and more convenient, but you are going down the wrong path and will be playing a game you cannot win. The odds are stacked against you. The time to get a bank loan is when you do not need it. When you are flush with savings, employed elsewhere, and just starting your business. Interestingly, banks are more likely to lend to you in this stage of your business than after you make the leap into being a full time small business owner.

This is such an important topic to understand. Dinging your personal credit score will affect your life for years into the future. In boxes you in and takes away a lot of options you will need. Protecting the score should be an absolute priority.

Good luck and as always send us your feedback and success stories.