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Will you ever NOT have to personally guarantee all your business loans?

Building business — not personal — credit to protect yourself from business debts

Running a small business requires managing a lot of moving parts. From payroll and purchasing to marketing and sales, a small business owner needs to be both the brain and heart of her enterprise.

Getting a business off the ground and thriving frequently requires a lot of small miracles. The idea of building something from nothing defies the laws of physics. To grow a business, an SMB owner generally starts by putting her own credit on the line. SMBs use the personal credit of their owners to finance their operations until the company builds enough credit and revenue to stand on its own.

By that point, a small business should have enough credit history to have its own business credit score. That’s the goal, anyways. But getting there requires a ton of aspiration mixed with a lot of perspiration, risking individual credit by personally guaranteeing business loans.

Will I always have to personally guarantee my business loans?

When your business is young and you’re focused on building things, most lenders and suppliers will require you to use your personal credit before you have established business credit. That means most credit cards, loans, and lines of credit will use your personal credit in some form to guarantee your financing.

There are exceptions, of course, but they frequently reside in the fine print of a lending contract. It’s really important to establish your business credit and start improving your business credit score if you ever want to stop personally guaranteeing your business loans.

Are you personally liable when you use a business credit card?

As an owner of a small business, even if you successfully apply for a business credit card, it’s likely that you’ve agreed to some extend to personally back your debts. That agreement may mean you’re totally on the hook or you’ve agreed to “joint and several liability,” which means you would share liability with the corporation.

The surprising thing is that even as an employee of a company, you may also have some personal skin in the game when you are issued a company credit card. That’s right, many businesses will issue their employees business cards as part of what’s called an individual liability account. That means if your company doesn’t pay its bills on time, you may be on the line. If the card was issued under commercial liability, the company is held responsible for the debts incurred.

What if you secured a loan by using personal property?

Lenders may ask a small business owner to pledge his house or property (like a car or boat) as security for a business loan. When that happens, the lender generally has the right to sue you to foreclose on your property.

Contracts signed personally versus by the company

Incorporating a business helps to shield a business’ owners and shareholders from legal liability. The corporate structure can also help to shield an owner from personal financial responsibility if the company can’t pay its debts (assuming an owner hadn’t put his personal credit on the line). But that’s only if contracts are signed on behalf of the company (and not on behalf of an individual). That means you should be careful to sign on behalf of your company when you sign contracts that obligate your company financially.

5 steps to stop personally guaranteeing your business loans

It’s unlikely that you won’t have to personally guarantee your business loans when your business is young and small. But it doesn’t have to be like that forever.

Here’s a 5 step plan to transition away from personally guaranteeing your business loans to getting your business to assume full responsibility:

  1. Make sure you’ve correctly established your business: These are the basics. You’ll need the appropriate licenses (state, county, federal if applicable) with a real business address, full company name (include dba if applicable), corporate structure (many prefer the C-corp structure for most businesses), and employee identification number (EIN). Make sure you’re using an EIN and not your personal Social Security number — the whole point of this exercise is to get credit for your business.
  2. Open a credit file with the credit reporting agencies: Here’s how to open a file with D&B. This step ensures that you’ve matched your credit file with your business, so that when you start adding accounts (next step), your payment history will get added to your credit file — a necessity to build credit in your business.
  3. Open accounts with suppliers: The way you improve your business credit score is to pay your bills on time. So, open accounts with some major suppliers (like shipping or office supplies) using your EIN and make sure they report to D&B.
  4. Apply for business-only retail credit cards: There are some business credit cards that use only your business’ EIN, like credit cards issued by some gas stations, Best Buy, and Office Depot.You’ll get a small credit line to use only at these stores, but they’ll immediately start to improve your business credit history.
  5. Open up a general business credit card: After you have some history paying your retail business credit cards off, you can apply for a general business credit card that can be used to pay for a wide variety of things your business needs.

Wait 30-45 days between each step. Make sure payment history is flawless as you take these 5 steps. As frustrating as this process may be, you’ll still need to keep your personal credit hunky-dory as you build business credit. Credit card companies may still look at your personal credit — even if they’re issuing you a business-only credit card.

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