Business Bankruptcy Can Ruin Personal Credit
Establish Solid Business Credit without Using Personal Guarantees
Oct 22, 2009
Economic downturns often highlight a brutal truth that can have a disastrous impact on entrepreneurs. A failed business can not only shatter your dreams, but it can also shatter your life.
Business bankruptcies can spawn personal bankruptcies because entrepreneurs are often held responsible for business debts. It is commonly believed that creating a limited liability company or corporation will protect personal assets, but that may not be true. Many business loans require personal guarantees from owners that will hold them accountable for repayment.
Business Bankruptcy Can Lead to Personal Bankruptcy
It is easy to say that entrepreneurs can avoid personal responsibility for business debts by simply avoiding loan and credit card agreements that require personal guarantees. This isn't so easy though, because most banks and financial companies now require these guarantees before they will approve the mechanisms. It’s also easy to fall into the trap of assuming that things will get better and that plenty of funds will be available to repay the loan or credit card. Unfortunately, that is an assumption that can't and shouldn't be made.
So why do entrepreneurs fall into the credit trap that can ruin them?
- Most entrepreneurs are hopeful and optimistic people who are not accustomed to failing. The brilliant business idea that they have “is going to work” and will bring, if not fame and fortune, at least a nice living.
- Most small business experts agree that a major reason for business failure is lack of financial resources when the business is opened. It is very difficult to truly understand the significant cost of starting a small business unless an entrepreneur has created a business plan and costed it out accurately. Unfortunately, the enthusiasm of starting a business often clouds the need to complete this step.
- It is not an uncommon mistake for an entrepreneur to skip the fine print on a loan or credit card application and just sign it, assuming that it is most important to get the money now and ask questions later. By spending the time to read all of the paperwork carefully, it is possible to avoid making obligations that will become compromising later.
- There is a misconception among many entrepreneurs and people who advise them that business credit must include personal guarantees. Unfortunately, the banks and financial companies who provide business credit are not likely to correct this misconception. While unsecured business credit without personal guarantees is not a phone call away, it is a possible option that can be obtained with proper knowledge and planning.
Build Business Credit
Entrepreneurs can avoid the disaster of losing their personal assets when a small business fails. It is essential to ensure that sufficient capital is available to finance operations before the business opens or, if that is not possible, at least have a plan in place to build sufficient business credit without having to provide personal guarantees. Be prepared to commit the time and energy it will take to build business credit. Financial stability is only possible if every effort is made to establish a strong financial footing and then monitor expenses and other obligations carefully.
