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Pitfalls of financing new businesses with personal credit cards

Building a good credit rating for a new business often challenges entrepreneurs in California. Lenders are reluctant to finance new businesses, and an entrepreneur might feel the need to tap into personal credit to launch a venture or keep it going in the early years. Although using personal credit might lead to success, it enhances the risk for entrepreneurs because their personal bank accounts and property could become vulnerable to business debts.

Whether business owners charge business expenses on a personal credit card or provide a personal guarantee for a business loan, they endanger their personal credit rating. High credit utilization will likely diminish their ratings. If business revenue drops, then credit card balances might go unpaid, which leads to high fees for interest and penalties.

Because many entrepreneurs go down this road, a recent survey found that business owners hold twice as many credit cards as consumers. They also carry double the credit limits. Ideally, a business owner would build credit in the business's name. A higher business credit rating could enable loans without personal guarantees. Building business credit starts with opening vendor accounts or obtaining a business credit card with a low limit.

A person launching a new business venture could seek legal advice before proceeding with financial transactions. An attorney knowledgeable about business formation & planning might recommend business structures that shield a person from personal liability or potentially limit taxation. Once someone decides how to structure a business, an attorney may be able to prepare the necessary documentation to form a new entity. This might include writing partnership agreements, articles of incorporation or an investor agreement. Going forward, legal representation may also provide insights about how to comply with employment law, negotiate leases or engage in interstate or international trade.

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