Cash
flow is the lifeblood of any business, no matter the size. If your company does
not have adequate operational cash flow (cash generated on a daily or weekly
basis from daily operation of your business), then you have to access cash from
selling assets (cash flow from investing) or from financing. To access
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. In other words, 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
guarantee. No personal guarantees.
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. That 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. But 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."
Tiffany
C. Wright is an author, business advisor, and interim CFO and CEO who has
helped numerous small businesses obtain over $31 million in financing. To learn
more about how you can build your company’s business credit and remove personal
guarantees and other hits to your personal credit, view this course. If you would like to contact Ms. Wright
directly, you can email her at twright@tocafamilyservices.com.
