23. November 2017

There is a massive difference in the types of debt you may have already or will take on for your business.

1 – Entity
First off if you are doing business as either a sole proprietorship or partnership then the point is mute because all the business debt is attached to you personally and there is no way of having it be otherwise. This is why your business should always be a standalone entity such as an LLC or INC. Without an entity then every dollar in debt your business owes you owe personally. If your business fails the creditors will come after all your personal assets to satisfy the business debt. In any scenario this is a horrible way to be in business and no one should risk it. Form an entity! In the case of a partnership, each partner is liable for 100% of the debt and creditors do not care who they take it from. In the event of a failure creditors will look to each partner individually and it is common to place liens on each partner for the entire amount owed. Yet another reason to form an entity!

2 – PG
The next thing to check for in your business debt are personal guarantees (PG). What these do is to make any debt that has them carry through to you personally in the event of a business default. This will be true even if you have formed an entity so these should be given out as little as possible. Many types of debt almost always require a personal guarantee. They are most common with business credit cards and term loans. They are far less likely and can be avoided all together with asset financing such as for equipment and vehicles, contract financing, invoice factoring, revenue based loans, purchase order financing and all types of vendor financing. Limit you use of personal guarantees when you can.

3 – Convert Debt
You should always take stock of what kind of business debt you have and focus on paying off that which holds you personally liable first. There are many ways to do this. For example, let’s say you have financed a vehicle and provided a personal guarantee. Now your business is a year older, you have taken the time to build your business credit and have your business become bankable so now you can refinance the same vehicle with a different lender and not sign a personal guarantee. If your business is now turning a profit and you have built strong business credit scores this will be true of any assets you have previously financed with a PG. If you have given your PG to vendors or other creditors you can now go back and ask to have it removed. If they refuse, then change vendors as there will be many ready to take their place.

4 – Personal Credit
Check your personal credit reports. Any business related debt that is reporting on you personally should be your top priority to either pay off or convert to true business debt. Also check your business credit reports. Many lenders such as Amex do not issue credit cards to small businesses. Instead they issue you a personal credit card with your business name on it. This is why you will not see it as a trade line on your business credit reports, but rather it appears only on your personal credit report. Kind of sneaky isn’t it?

5 – Ten Reporting Trade Lines
There are many articles out there providing terrible advice. Such as advice like “pay off all your small business debts first”. Pure junk! To build and maintain strong business credit scores you need at least ten trade lines that report each month on you paying your business bills on time. Way too many business owners do not know that this is a vital component of making your business bankable and able to stand on its own for financing without your PG. Instead when creditors pull up their business credit reports they see only 2 or 3 reporting trade lines. Business owners think this is great. IT IS NOT! Now you have no credit history for lender to base their approvals upon and you are forced back into everything requiring your personal guarantee.

The bottom line is that business debt is not a bad thing and neither is PG business debt when used to turn a profit. Having your business take all the steps to becoming bankable and thereby being able to stand on its own for financing is the key to your business debt not keeping you up at night.

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