What is the lifeblood of any business, regardless of size? Cash flow. If your company does not have adequate operational cash flow (cash generated from the daily operations of your business), then you have to access cash flow from investing (selling existing assets) or cash flow from financing (obtaining a loan or an equity infusion). To access debt or related financing either you as the business owner or your business needs credit. If you want to keep your personal finances COMPLETELY separate from your business finances, you will need to establish credit for your business that is completely separate from you. Put another way you will want to obtain supplier terms, bank loans, and equipment financing with only the company’s performance or assets as a guarantee of performance, not YOUR assets or signature as a personal guarantee.
Imagine this scenario: Your business has been doing extremely well but two of your largest customers file for bankruptcy and you did not see it coming. This could wipe out your business cash flow overnight, especially if you had not been managing your receivables tightly and those customers owe you a large sum of money. Regardless, you will need time to build relationships and replace those customers. Your business may encounter financial distress in the interim as a result. If the company subsequently cannot make its payments on loans or to suppliers, if you have personal guarantees in place, those guarantees could be called upon.
So in the case of a failing company, whether temporarily or permanently, you would lose the income the business paid you as a salary PLUS you would have to make loan repayments out of your personal assets. It just went from bad to worse! What if all you had was tied up in the business? Well, if the company has to file for bankruptcy, you may have to also. If you had stand-alone business credit, your personal finances would not be an issue. You may CHOOSE to inject money into the company, but you would not HAVE to.
In a less serious scenario, your company has encountered some difficulties due to the current economic environment and now “recovering” recession. You would like to negotiate better terms on your loan or with your suppliers. If the company is the sole guarantor and the company is struggling, assuming you have a decent plan to weather the storm, your lender is highly likely to negotiate with you. However, if you are a guarantor and have sizable assets, why should the lender negotiate when they can pursue your assets and be done with it? (Of course, having a strong relationship with your lender ALWAYS helps.)
On the opposite side, many business owners complain about how all the credit they have for the business in their name drags their personal credit scores down. By separating and building your business’ credit profile, you, as the business owner, can get business credit cards, equipment loans, etc. in the business’ name and tax identification number. Consequently, the business loans will not be associated with the owner’s social security number and thus, do not impact his or her personal credit. Again,no personal guarantees.
Okay, enough of the what if scenarios. You get the gist behind the reason for having a strong business credit profile. For emphasis one more time, here’s what Wells Fargo Bank has said regarding separating business and personal credit and financing: “The longer you delay establishing business credit, the longer you delay taking advantage of business loans.”