Can Your Small Business Ruin Your Personal Credit Rating?

Taking charge of your own business and personal credit rating can be a rewarding and life-changing turn in your career. However, you should not let the freedom, flexibility and financial opportunities of being a business owner mask related risks and exposures.

Many accidents, errors and other unfortunate incidents—many of which may be beyond your control—could impact your company. As the owner, you must be prepared for how such situations may impact your personal finances, such as your credit score.

How Can Business Finances Be Tied to Personal Situations and Personal Credit Rating?

While starting a business can be exciting, it also often requires a significant capital injection, which may mean using personal funds or borrowing funds with the hope of growing the business to profitability. However, this step entails risks, especially in small businesses where the separation between personal and business financial responsibilities may be blurred.

Consider the following examples of how owning a business can impact your credit rating:

• Personal guarantees—In many cases, small business loans and company lines of credit may require you to make a personal guarantee, essentially making yourself and your family responsible for debt that might not be paid back. If the business cannot pay back the debt, the owner (and their family) will be personally liable. This can affect your personal credit score and ability to borrow money in the future.

• Sole proprietorships—If your business is a sole proprietorship, there is no legal separation between the individual and the business. As a result, your personal and commercial credit scores may be linked, meaning any financial difficulties in the business will directly impact your personal finances.

• Business credit cards—Some business credit cards may report activity to personal credit bureaus, depending on the card issuer. If a business account has late payments, balances or defaults, it could impact your personal credit score, making it harder to obtain loans in the future. Utilizing other tools, such as establishing LLCs, may assist in limiting personal liabilities for business debts, but these situations can be complicated, and it may be advisable to enlist the assistance of a financial professional.

We’re Here to Help

Given the risks and rewards of operating a small business, you should prioritize enlisting qualified help. Contact the team at Sunstar Insurance of Arkansas today to learn more about securing the financial interests of your company.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.