On September 16, 2009

Common Financial Mistakes – Part 1

This article is the first in a series of posts about common – and costly – financial mistakes small business owners make

As an entrepreneur, you’re hardwired to enjoy a greater level of risk than the average person. But, if there’s one thing you don’t want to risk – especially in today’s economy – it’s your personal financial security.

The unfortunate reality is that small business owners often make critical financial mistakes when financing the launch, operation or growth of their businesses, mistakes that can severely limit the amount of funding available for their business and, ultimately, jeopardize their family’s financial well-being.

You may not even realize that you’ve made a mistake until one day you find out that you can’t qualify for a mortgage. Or you can’t get the to-die-for financing offered on the new car you want. Or you find you can’t secure a credit card for your small business. Or worse yet, your business runs out of cash and you can’t get the financing you need to keep it afloat.

Consequences like these are often the result of approaching your business without a strategy for responsible business development, with a Technician’s mindset rather than the Entrepreneurial mindset. While The Technician in you has an important part to play, the financial health of your business is about more than just “doing the math;” it’s about taking the perspective of The Entrepreneur and thinking and acting with a long-term strategy. It’s about knowing that the decision you make today will have consequences in the future.

Remember, a successful business – an E-Myth’d business – is an asset that fuels the path towards more life. Getting your financial house in order is critical to growing your business asset and obtaining financial freedom!

The Biggest Mistake You Can Make

The hands-down biggest and most common mistake small business owners and entrepreneurs make is using personal credit to finance their businesses. Common examples include:

Paying for business expenses with your personal credit cards
“Borrowing” money from your personal savings, checking, retirement or other investment accounts to “invest” in your business
Obtaining personal loans to finance your business expenses

It wouldn’t surprise us to hear that you’ve used one or more of these financing methods to fund your entrepreneurial ventures. Many business-start-up experts recommend these methods for funding new businesses. While their advice is well-intentioned, it can be disastrous. The reason for not using your personal credit for business purposes is simple: it may destroy your personal credit.

By using your valuable personal credit for business expenses, you 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.
Reducing the amount of credit available for personal use. 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.
Losing everything. 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.

Build your Business Credit Separate from your Personal Credit

To protect your financial security, the bottom line is: don’t use your personal credit to finance your business activities. Instead, you should take action to secure credit in your company’s name immediately.

It’s important to remember that you are not your business. An integral part of creating an “E-Myth’d” business involves building your business into an asset – a separate entity that you can pass on to family, sell outright, or own without actually running. It’s about building a business that isn’t dependent on you.

One of the ways you can support the development of an E-Myth’d business, and avoid the pitfalls we mentioned above, is by separating your personal and business finances (credit included). Not only will this help you create a business that isn’t dependent on you, it will help you relate to your business more objectively, track, quantify and keep more accurate financial records, and make better and more informed management decisions in general.

Here’s the good news: it’s not too late. You can have the peace of mind and financial freedom that will allow you to concentrate on the critical business-building work necessary to create a world-class E-Myth’d business. Whether you’re a start up or a well-established business, the time to begin creating a business credit asset is now.

The System for Building Business Credit

Like any other strategic business work, building good business credit requires patience, diligence and dedication. It helps tremendously to have an ally and an expert to assist you in the process of safely establishing business credit.

To learn more about the how you can create your business asset, click here for a complimentary business credit consultation and to obtain our free e-Book, “Unlimited Business Financing – Without a Personal Guarantee” – a step-by-step process for building a business credit asset.

Learn more