When should I use my personal credit for my business?

Edward Whittaker has grown Great Basin Power, which sells energy equipment, including generators, solar, and energy storage to a six-figure business. He started using personal credit, but moved to business credit as quickly as he could. 

“For the first several months of operation, I had no choice but to use personal credit cards for everything including all energy equipment, travel, fuel, etc.,” he says. 

But as soon as possible, he began to build his business credit. “As a sole proprietor, I used my personal credit as my primary vehicle to build my business credit including securing lines of credit, charge cards, and business credit cards,” he explains. 

Since then he’s obtained a variety of financing in the name of this business. He’s obtained lines of credit from American Express and his bank, two business charge cards, and “seven or eight business credit cards.”

He relies strictly on business credit these days, and his business continues to flourish. “My personal credit remains untouched and it’s going to stay that way,” he says. 

Here’s what you need to know before you use personal credit for your business. 

Is it ever OK to use personal credit for business expenses?

Lots of business owners use personal credit to fund their businesses, including personal credit cards or personal loans. 

In reality, many entrepreneurs have no choice but to rely on their personal credit history. 

MonicaFaye Hall, the owner of The Digital Hall, which offers digital marketing consulting, strategy, and management services, used personal cards and personal savings when launching her business. 

“I believed at the time, this was the best course of action to get my business off to a great start,” she says. “It was a huge mistake. If I could do it over again, I would start building business credit and slowly build. The fast route isn’t always the best.”

Her business is growing, but one reason she regrets the route she took was that she used personal credit to get things that weren’t necessary. “I wanted everything on day one which was not necessary,” she says. 

If your business is structured as an LLC or corporation, talk to your legal advisor before you mix personal and business finances. Get advice to avoid putting the asset protection benefits of your business entity at risk. 

Situations in which personal credit for business may be necessary

There are a number of reasons why business owners might turn to personal credit to fund their business:

The business is a startup

It’s no secret that it’s harder for brand new businesses to get funding. A new business may find it harder to get business loans or credit. 

Easier approval 

If you have good personal FICO scores, you may find it very easy to get approved for a personal loan or a personal credit card. 

No business credit history

A business that hasn’t established business credit reports or business credit scores may find it challenging to get credit in the name of the business. 

Low or declining revenue

Many types of small business loans and financing require proof of revenue in the form of business bank account statements.

Personal credit is available

If you already have a wallet full of credit cards with lots of available credit, that may prove to be the easiest and fastest route for funding your business. 

No collateral required

Unless you’re planning on using a home equity loan, you may be able to use personal credit without having to pledge collateral. 

Why keeping clear records is essential if you use personal credit for business

Using your personal credit for business needs can be a quick fix, but if you go this route, keep good records. Keep track of what you spend on your business from your personal finances. This matters for taxes and managing your money. 

Keep a detailed log of all business charges on your personal credit cards or loans. Write down the date, amount, and reason for each expense. Save receipts too. Good records help you at tax time and show you exactly how you’re spending money on your business. 

You may be able to deduct interest on loans used for your business; check with your accounting professional.

Keeping good records helps you track your business growth and manage your cash flow better. And, if you ever get audited, you can document which expenses were really for your business. Without proper records, mixing personal and business money can cause legal and financial problems later.

What is a personal guarantee?

A personal guarantee is a promise made to personally repay the money a lender issues to your business in the event your company fails to pay back the financial obligation as agreed. A personal guarantee essentially makes you a co-signer on a business debt.

Lenders ask for personal guarantees because it reduces their risk when you, the business owner, have some skin in the game. If you have good personal credit, you may be able to secure higher limits, lower interest rates, and better terms on business financing.

If you’re asked for your Social Security number, that often means the lender will check your consumer credit report and/or personal credit score, and a PG may be required, though neither is necessary. Read the application and loan agreement carefully. 

Should you sign a personal guarantee?

Before you agree to use your personal credit to secure business financing, understand what you’re getting into. A personal guarantee may reduce risk for lenders, but it increases risk for the person who is signing it.

When you sign a personal guarantee, here’s a look at what you might be putting on the line to help your company secure financing:

• Your personal finances
• Your personal credit rating
• Your personal assets (e.g. home, car, real estate, bank accounts, etc.)

Your goal should be to eventually avoid personal guarantees as much as you can. 

Unfortunately, it’s not always easy to steer clear of this requirement if your business is young or hasn’t yet established a strong business credit rating.

While there are some lenders willing to grant loans without a personal guarantee, the truth is that it’s typically more challenging to build business credit without accepting some personal liability. There are even some types of financing, like SBA loans, that may be impossible to qualify for without a personal guarantee.

If the risk makes sense and you’re comfortable putting your name on the line to secure funding, it’s okay to use your personal credit for your business. If you’re not comfortable with the risk, you should probably avoid it. Only you can make that decision.  

Why building business credit should be a priority

Jacob Nelson, CEO of A1 Consulting LLC, a firm that searches for and fulfills government contracts, has had no choice but to rely on personal credit while he works on building business credit. 

It has “limited me very much on the contracts I can bid on due to not (having) the entire funding beforehand.” Fortunately he has decent personal credit, but in the past he’s had to run up balances on his personal credit cards, and hurt his credit as a result. 

Nelson is focused on building business credit so he can access better opportunities for his business, and avoiding the impact to his personal credit.

Faye is doing the same. “I have stopped using personal credit and (am) working towards building my business credit,” he says. “I am taking time to understand business loans, lines or credit, and credit cards prior to entering into any agreements.” She encourages other business owners to learn about building business credit from the beginning.

“Educating yourself is important in the process of developing a business plan,” she advices, “not after the business has launched.”

Why to avoid using personal credit cards for business

According to Nav research, small business owners have nearly twice as many credit cards as consumers. Their credit limits are also almost twice as high. While there’s nothing wrong with having numerous credit cards and higher credit limits (as long as they’re well managed), these numbers may be the sign of a troubling problem.

Funding business expenses with personal credit cards can be problematic for two reasons.

• High credit utilization ratios on personal cards can damage your personal credit scores.
• Using personal credit cards instead of business cards robs you of the opportunity to build credit history for your company.

Instead of using a personal card to cover business expenses, a small business credit card is typically a much better fit. 

Most issuers that offer these cards report to business credit. And most are startup friendly. You may qualify if you have good personal credit and sufficient income from all sources.

Although small business cards almost always require a personal guarantee, many business cards won’t report to the personal credit bureaus (as long as you’re on time with your payments). This can protect you from lower credit scores in the event you ever run up a high utilization rate on a business credit card.

Just keep in mind, should you sign a personal guarantee for a business credit card, you’ll still be on the hook if your business fails to pay as agreed. Best practices for managing any type of credit card (personal or business) involve paying your balance in full each and every month. When you follow this rule of thumb, you’ll avoid spending money on high interest fees plus you’ll protect your credit scores from potentially being lowered due to high utilization.

How to establish business credit 

“The mistake I have made is moving too quickly to take out loans in my personal name to secure funding instead of structuring my business to appear fundable to the banks,” says Tammy Hailey, owner of Powerside LLC, which offers a variety of business consulting services. 

“I have learned that (taking) the time to align your business accordingly, and keeping all your business information separate from your personal information, and having an online presence,  will make it easier for your business to obtain financing,” she says. 

The steps Hailey recommends are all essential in the business credit building process. In a nutshell, you’ll want to:

1. Build your business foundation: choose a business name, address, website, email, and phone number. 
2. Register your business: form an entity (LLC or corporation) if possible, get an Employer Identification Number (EIN), business licenses, and/or file a DBA.
3. Get a D-U-N-S number: Register for this identifier for the Dun & Bradstreet system. 
4. Get credit accounts that report to business credit agencies: these can include net-30 vendor accounts and other tradelines like Nav Prime. 
5. Open a business credit card: Get a business credit card that reports to business credit bureaus. (Most major credit card issuers do.) 
6. Pay on time. On time payment history is the number one factor that can help establish your business credit. 
7. Monitor your credit. Keep close tabs on your business credit to track your progress.

Nav’s Build Business Credit Checklist will walk you through the steps of building business credit. 

How Nav can help you build business credit

Nav’s free financial health platform was created for small business owners to track and improve business credit and cash flow health, alongside a marketplace of financial products for every stage of growth.

Nav can help you find the best business credit cards for your business, including credit cards that report to business credit. With Nav Prime, small businesses unlock the most comprehensive toolset to build business credit, track cash flow, and manage financial health. And Nav Prime is submitted as a tradeline to major business credit bureaus. 

FAQs

Can I use my personal credit to build my business credit?

Your personal credit report and scores may help you build business credit. Some types of small business financing will offer credit to business owners with good credit. If those accounts report, and you maintain a good repayment history, you may build credit references that help you move away from personal credit. 

Is it legal to use a personal credit card for business?

Check your cardholder agreement to see whether the terms and conditions prevent you from using your credit card for business purchases. If not, and you can’t get a dedicated business credit card, you may want to consider using your personal card this way. 

How is your personal credit used when you begin your small business?

Some lenders check personal credit, some check business credit, and some check both. (A few types of financing do not rely on credit checks at all. Typically that type of financing is based on revenues, rather than creditworthiness.)

How long before you can use business credit?

Every business journey is unique, but generally, the sooner you establish business credit, the sooner you’ll be able to use your credit profile to qualify for financing in the name of your business. Other qualifications such as business revenue and industry, are also important to many lenders.