Business vs. personal credit | SupportBiz

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Business vs. personal credit

As a business grows from a start-up to a micro enterprise, managing the struggling on all fronts is an achievable task, including the arrangement of finance, which is mostly obtained from personal sources. However, as one experiences or anticipates big growth, it impacts all aspects of business. Growing big means bigger challenges and changes. It is also likely that the entrepreneur will need to raise a substantial amount of money, depending on the type of business he/she is in.

This is when the personal sources fall short of requirements, and the entrepreneur has to start thinking in terms of borrowing money from outside for growth. At this stage, it is crucial for an entrepreneur to be so well-prepared that he/she has the best possible chance of getting approved. The best way to do that is to assure that the enterprise has good ‘business credit’. Notice that the term used is ‘business credit’ and not ‘personal credit’. This is an important distinction that most business owners fail to appreciate fully.

One of the skills that every entrepreneur needs to learn as a part of growing a business is looking at the business as something separate from him/her. One owns a business, but he/she are not the business. Also, one of the most important places to practice this mindset is in the separation of business and personal finance.

Personal credit

As a business owner, needless to say, an entrepreneur has already gone through the process of building good personal credit. Possibly, one has used personal credit to set up his/her business venture, initially. However, the business must stand alone as an entity, with its own credit, as it grows bigger and bigger.

Business credit

Your chances of obtaining business financing can increase dramatically if you have business credit. Building business credit can protect you from business liabilities, as business credit beyond a certain stage may not require an owner's personal guarantee. An owner with good business credit can also increase his or her chances of getting an attractive interest rate if good ratings are obtained from credit rating agencies.

Creating good business credit

One of the major indicators for judging business credit is the rejection of financing proposals by lenders/investors. The second indicator is poor credit rating by credit rating agencies – if one analyses the same, he/she will get an idea as to what is lacking and what is required to be done to enhance business credit. Like good personal credit, building good business credit takes time and requires many steps. Generally, a good business credit profile can be established through:

• A good business modal – with a properly documented business plan

• Good ‘scale-up’ and ‘innovation’ possibilities

• A proper legal entity - partnership, private limited or public limited company

• Good succession plan – separation of the entities of promoters and business

• A good management team to execute the business plan

• Good and transparent professional set-up, with strong processes and systems

• Transparency in financial reporting – timely, adequate and accurate

The moment a business is required to borrow money from outside – either debt or equity – there is a corresponding accountability in the form of satisfying the lenders and investors. All those who have succeeded in building this business credibility have succeeded in raising timely money for their business requirements.

Chaitanya Shah is an SME – Financial & Growth Navigator. He can be reached / or +91-9322232039.