By Rich Best

One of the core pieces of advice that business owners should follow is to not mix business finances with personal finances. The reasons for heeding this advice are many. Commingling business and personal finances can complicate record keeping and tax filing. It can also lead to legal problems, should your business face any sort of liability, which could also put your personal assets at risk. The problems of commingling are further compounded if you develop the bad habit of carrying business balances on your personal credit cards. Quite simply, it can sink your credit score, which could make it very difficult to get financing for your business.

There is no mystery as to what factors can adversely affect your credit score. Missed or late payments are a primary factor. Because this is often the result of amassing more debt than your cash flow can support, the next most important factor that is considered by credit rating agencies is the size of your balances on each credit card. The key determinant is the size of the balance in relation to the available credit. Even if you make your payments on time, carrying large balances will cost you points on your credit score.

It is understandable why new business owners would use personal lines of credit to finance business expenditures. Cash flow is usually an issue in a young business, and it’s too soon to be able to establish a line of business credit. However, once balances have been run up on your personal credit cards, it will be difficult to qualify for additional personal credit, much less business credit. It is important for new business owners to manage their personal credit so that they are not cut off from all forms of financing.

Business credit card expenditures need to be weighed carefully against the prospects for generating a sufficient return on the expenditure that will go to repay the debt. The general rule for businesses, and individuals for that matter, is that if it takes a credit card to cover the expenditure, it is not affordable and the purchase should be delayed. If there is a possibility that the expenditure will not result in a repayment within a couple of months, then the business owner should consider a smaller purchase. If a large expenditure is required, other methods of financing should be considered, such as a personal loan from a relative or a collateralized loan such as a home equity line of credit.

It is important for a business to qualify for its own credit. While this is difficult to do for a new business, steps can be taken early on that could result in more immediate consideration by a bank. Any business can work towards developing a business credit score. PAYDEX®, which is a part of Dun & Bradstreet®, is a system similar to individual credit scoring.

The easiest route to building a PAYDEX Score is to apply for an ID number with them and then open up some small lines of credit with office supply stores, which report directly to PAYDEX on the payment history of the business. You can build a solid PAYDEX Score simply by keeping your payments current.

Having a good business credit score does not mean you can let your personal credit score slide. Your business credit worthiness depends on both your business score and your personal score. The best credit management practice is to keep your balances low on both business and personal credit lines.

Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. He has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank.

PAYDEX® and Dun & Bradstreet® are registered trademarks of Dun & Bradstreet, Inc. and Nevada State Bank does not claim any ownership or exclusive rights to the use of these trademarks.