Most small-business credit cards are backed by a personal guarantee, so maxing them out may affect your personal credit record. But the bigger question is why you need to do so in the first place.
Dear Your Business Credit,
Will it affect me if I max out my business credit cards, even though I pay them off every month on time? I worry it will affect my good personal credit history. — Leo
The short answer is, possibly. On its website, the credit bureau Experian says that if you guarantee a business card with your personal credit, your business-card usage may appear on your personal credit report — or on both your business credit report and personal credit report. A business credit card affects your personal credit less than a personal credit card, but it can still have an impact — especially if you miss a payment when you are maxed out.
Since you say you pay off your accounts every month, I’m assuming you may be pushing your credit limits in order to maximize rewards earning. That can be a good strategy unless you intend to borrow money soon for a personal expense. The credit bureaus can take a snapshot of your credit usage at any point during the month — on the day before you pay up, when all the charges are there, or the day after, when your slate is clean. If you’re in the market for a car loan or other type of credit, consider paying twice a month or asking for a credit line increase so your credit utilization ratio is never too high.
On the other hand, if you are maxing out the cards because you can’t keep up with expenses, that could be a problem. Many healthy businesses occasionally borrow to their credit limit to take advantage of an opportunity for growth that comes with an expiration date. For instance, a retailer might borrow heavily before the December holidays to stock up on inventory.
But maxing out your cards every month because you are spending money a lot faster than you take it in could be a warning sign that something is broken at your business.
The good news: This is a problem you’re in a good position to solve. Analyze your operations to find out why you can’t pay your bills with cash on hand. Are sales slow? If so, why? Are you sending out invoices on time? Have you forgotten to follow up on accounts receivable? Factors like these can put you at risk of business failure.
By correcting any underlying problems affecting your cash flow, you’ll put yourself in the position where you can use your credit cards in a healthy way, without being overly dependent on them.
Set aside some of your revenue to build up some cash reserves as soon as you can. Many businesses don’t do this — and it leaves them vulnerable. A recent report by the Corporation for Enterprise Development found that 55 percent of owners of very small firms said they could only cover a single month’s business expenses — or less — with their savings.
To get started, set up an automatic deduction from your checking account to put into your savings. Do that for a while and you’ll be surprised at how fast your savings build up — and your need to be prepared for any credit decreases.