Everyone has credit cards these days, even with the economy continuing to lag and financial trust not what it used to be. For first-time small business owners, though, it may seem more difficult to obtain credit for a company, so using personal cards may come to light as an easy funding source. Using this out is a trap that could land you in more trouble than you want if things continue to sour within the organization.
Supply and demand
Getting a commercial loan that's specifically for business use helps prioritize funds and separate individual and corporate finances. Not everyone is able to do this, but it's a skill you need to master. Otherwise, you could be jeopardizing your financial health.
There are those economists who believe the current lull in business loans is due largely to private funding of companies through personal cards, according to BusinessWeek. For the longest time, the U.S. economy has been in a slump, and banks were unwilling to lend as easily or as much as they used to, making it difficult for startups and existing owners to get credit and stay afloat. Some of these owners tapped into personal lines of credit and stayed afloat, while others floundered and found themselves in even more danger.
Getting too personal
With a card in a business name, limited liability is placed on the owners and partners of an organization, should the enterprise default and bills go unpaid. Transferring some of these debts to a personal account, however, could lead to lingering nightmares even years after a company has closed.
Open an account in a business name and you'll have to name individuals who are able to access and consult with financial advisers on its status. Opening a business credit card account doesn't require a personal connection, according to Fox News, meaning if a credit agency reviews an individual's information to obtain the account, it still doesn't tie the liability to that person should the company go under.
A private card, however, will keep a balance after a foreclosure or other ending event. The National Small Business Association (NSBA) reported that one-third of owners overall are relying on credit to get by. The report also found that an increasing number of owners are having problems with shrinking ceilings, wherein the card issuer randomly reduces the spending limit on a card, pushing them to place more on private cards and withdraw from personal savings.
"The owner may need to take a step back, look at the overall operations of a business and consider restructuring, if necessary, to get the business close to break-even before utilizing credit card financing for purchases," said Xavier Epps, a financial adviser with XNE Financial Advising. He told Fox Business News that increasing corporate debt can decrease its ability to make money in the future.
Despite that, the NSBA did report fewer companies carrying debts over $250,000 per year, and the ability of owners to pay off credit card bills monthly was on the rise. Economic outlooks may be starting to improve, but increasing personal risk to keep a company alive could be more damaging than it's worth. As Epps suggested, adjusting operations and finding other ways to cut costs may be a more sensible solution than opening a personal card up to business expenses.