A common mistake made by many entrepreneurs is taking out a personal line of credit to start a business.
It sounds like a sound financial move, but it can actually have devastating consequences. The mistake is easy to make. Many people with good credit already have an often-untapped line of credit with their financial institution.
Never Mix Business and Personal Assets
On the surface, it seems like a “no-brainer.” The money is just sitting there waiting for you to use it. Why not tap into it to get your dream of owning your own business? However, that seemingly simple transaction can decimate your personal financial well-being, destroy your personal credit, and leave you with a lousy credit rating for years to come. It also means you will be mixing your business and personal assets. Any accountant or financial planner will tell you this is a recipe for disaster.
Personal credit lines are fairly easy to get, but they come with a price. They have very high interest rates when compared to other types of credit. In most cases, credit card companies charge you fees every time you access the line. Additionally, if you should fall behind on payments – a very real possibility in these uncertain times — it will affect your personal credit score. This means you might find it even more difficult to get a business loan later on, once your business is up and running.
The Bottom Line
Simply put, the experts say you should never fall into the temptation of using your personal line of credit to start your business. While they may take longer to obtain, or be harder to get, you should always seek specific sources of business credit for your business, such as a small business loan, or business line of credit.
You should never put your personal finances at risk in order to buy a business, or keep one going. A successful business will not require you to do so. If your business should fail, you need to be able to walk away from it without taking your personal finances down too.