Your Business Credit

Financing your business without relying on personal credit


You can fund a startup without a personal guarantee, but it won’t help you build business credit

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Dear Your Business Credit,

I am just starting out with a new business and I need to know how I should go about applying for business credit cards and loans in the future. I want to make sure though that my personal credit is not involved in any way – ever. Got any advice? I would love to hear it. Thank you very much. – Priscilla

Dear Priscilla,

Congratulation on taking the leap and starting your business!

Many startup owners write to me saying they don’t want to put their personal credit on the line but still want to be able to borrow. The most important thing to understand about traditional business credit is that it is primarily based on your personal credit. Like anyone who makes a loan, banks and credit card companies want to be paid back. To make sure that happens, they typically impose a personal guarantee when a small business applies for credit, so the owner can’t just walk away from the debt if the business fails or closes. That means the small-business owner is personally on the hook for the debt.

So what do you do if you need credit but do not want to risk your personal credit? My suggestion is to turn to other types of financing. Friends and family are a perennial source of credit for business owners. Perhaps there is a family member who will make a loan to you, without asking for a personal guarantee.

Some friends-and-family lenders may feel more comfortable if you formalize the loan, in a legally binding document known as a promissory note, so there are no misunderstandings. There are several sites that can help you do this, among them LendingKarma and LoanBack. You can also do it yourself (See “Lending to friend and family: Your 4-step guide” and the accompanying sample promissory note). However, if you create a promissory note and don’t pay your lenders back, they could go after you in small claims court to get a judgment against you.

Of course, if you go this route, you never want things to get to the point where you default. Never borrow more from friends and family than you can reasonably expect to pay back if the business fails and you suddenly have to get a traditional job. Otherwise you could lose some important relationships, as well as your business.

Another suggestion is to finance your business through cash flow. Some entrepreneurs do quite well by asking customers to pay them in advance. Whether you can reasonably do this depends on your business model and industry norms. In a professional services business, asking for deposits in advance is not unusual and can bolster your cash flow to the point you don’t to rely on credit. For retail business owners, setting up an automatic shipment program for customers (think, monthly diaper shipments from Amazon) can be a way to strengthen your cash flow.

If you are developing a new product, you might consider running a crowdfunding campaign on a site such as Kickstarter or Indiegogo. Customers may be willing to pay you in advance for your product, before you even create it, through one of these sites.

Ultimately, though, I would suggest that you do try to build some business credit through traditional means, such as a business credit card, even if it does mean giving a personal guarantee. If you build a solid business and have a track record of paying your bills on time, why not make the most of it by getting a credit card and building a credit profile for your business?

Establishing a strong track record of paying your credit card bills on time will help you if you decide to go after a bank loan someday. Just steer clear of racking up business charges that are so big you can’t personally pay them off with the money you have on hand now. That way you won’t find yourself lying awake at night worried about your personal credit.

See related: To get a business loan, you may need to buff personal credit, Understanding small-business credit reporting, 5 steps to prepare your finances for a startup

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