The Risk of Running a Business

If you are an entrepreneur, than you naturally will face a greater level of risk than the average person, but are you willing to risk things such as being hounded by creditors, declaring bankruptcy, being denied a mortgage, paying more than your fair share of interest on your loans, or possibly losing your house? These are the type of risks you face as an entrepreneur.

In most cases, the biggest as well as the most common mistake that entrepreneurs make when running a business, is that they use their own personal credit to finance their business instead of using business credit and taking out a business line of credit. Examples of how they use their personal credit would be paying for your business expenses with your personal credit cards, borrowing money from your personal savings, checking retirement, or other investment accounts to invest in your business, and obtaining personal loans to finance your business expenses. Entrepreneurs need to use corporate credit to run their business.

When entrepreneurs use their own personal credit for business expenses, they run the risk of lowering your personal credit score. When you personally guarantee business-related financing, the lender will require a personal credit check. Every time an inquiry into your credit history is made, your personal credit score takes a hit. The lower your score drops, the harder it is to secure financing, especially financing with the most favorable terms. Also, the more credit you have personally guaranteed for your business, the higher your debt-to-income ratio soars and the less that lenders will be willing to give you for personal use. Signing that loan for your business could prevent you from getting a mortgage on the new house you plan to buy a year from now. In addition to this, when you use your personal resources or credit to finance a business, you chain your financial security to your company's success. If the company fails, you'll be left holding the bag and your personal finances will sink along with your business. You'll never recoup the “loan” you took from your retirement account to get your business launched. Creditors will be calling you for payment. And if things get bad enough, you may have to declare bankruptcy.