Having and using credit are virtually inescapable parts of life today. You don’t just utilize it to make purchases with a credit card machine as a consumer; credit is also an integral part of funding and running your business. Therefore, it is necessary that you understand the often complex relationship between your personal and business credit cards.
The Personal Credit Trap
If you are the sole proprietor of your small enterprise, you may be struggling just to make ends meet. To simplify your life, have you made the same mistake that many of your fellow entrepreneurs have by using your own personal credit to open and run your business?
While it may seem easier in some ways, it puts you at significant risk. Suppose, for instance, that your startup fails. Do you want to be held personally liable for your company’s debts, possibly even losing your home or your vehicle?
What You Need to Know
Like it or not, banks and other lenders do not always separate your business credit from your personal, and applying for a merchant services account is no different. In fact, they often use your individual credit history and score to predict whether you will be a risk.
If you used your personal credit to obtain financing for your business, your own credit report may be positively or negatively affected by your company’s success or failure. Your credit doesn’t have to be perfect to get approved for a merchant account, however. It all depends on the type of account you are applying for and the volume of goods you expect to process.
Obtaining a Merchant Account
Obtaining business credit to separate yourself as much as possible from your personal credit is a goal worth pursuing because things can happen that can impact your finances. For example, when a transaction is made using the credit card machine provided by your merchant account provider, funds are immediately removed from the customer’s account into your business’ bank account. If a chargeback is issued, the funds are then moved back from the business to the customer. If there are no funds to cover the chargeback and fees, the money has to come from somewhere, and it likely will be taken from the business owner’s personal account.
Your personal credit score shouldn’t impact the fees for your merchant account, but it could affect the overall cost of your account. A cash reserve is sometimes required to obtain a merchant account if a person’s personal credit is weak, and this reserve usually affects the overall cost of the merchant account. If your company is small and these costs are significant, you may feel a financial pinch.
If weak personal credit is keeping you from obtaining a merchant account, don’t give up. Enlist a co-signer with better credit on the account or reevaluate your budget to see if you can afford the extra costs to have a reserve in place. Do your homework and pick the best choice for you, and your credit will help you to start, maintain and expand your company.