Many start ups are financed with the personal funds of the small business owner. As a financial advisory for business services, we see business owners refinance their mortgages to get cash back or take cash advances on their Visa, MasterCard, American Express or Discover credit cards.

By taking these actions, the business owner immediately affects his or her personal FICO credit score. Borrowing more money against the available personal credit limit reduces the ability to obtain more credit in the future. 

To obtain financing in this manner may appear to be an easy and obvious solution, but it may cost you more money in the long run. Banks and other lenders look at the percentage of money that you owe compared to available credit limit. This is called the debt service ratio. The higher the ratio, the higher the “risk” you are perceived to be. As a higher “risk” if you are granted a credit card, loan, or extended credit it could be at higher interest rates.

Financing this way will eventually affect your ability to get corporate credit lines also. Therefore, it is important to totally separate your personal credit from your unsecured business credit card debt.

We recommend to our clients not to refinance their mortgages, borrow against any of their credit cards, and not to liquidate their 401K’s. Instead we suggest leveraging the bank’s money by obtaining unsecured business lines of credit.

We can arrange for unsecured lines of credit through Visa, MasterCard, American Express, Chase or Discover credit cards, all of which will be in the corporate name.

As part of the process, the personal credit profile of the business owner will be used to obtain the corporate credit cards from lenders. As they are corporate cards, the business credit card debt will not appear on the personal credit report of the small business owner.

If unsecured corporate lines of credit are offered by banks and lenders based on the personal credit report of the business owner, it is apparent that borrowing against real estate or cash advances on credit cards will hinder the entire process.

Obtaining unsecured lines of credit in the corporate name separates personal credit from the business credit card debt. It also protects the personal assets of the business owner company meanwhile keeping the same financing options available, and in many cases improving them.