How to Start a Small Business Without Ruining Your Credit

Starting your own business is no doubt a noble endeavor. But on the road to becoming a successful entrepreneur, you’ll encounter numerous obstacles that will test your courage, character, and ability to remain focused and positive. To take the helm of your own enterprise is truly the adventure of a lifetime.

For aspiring entrepreneurs, starting off on the right foot in terms of financing is often a challenge. If you don’t tread carefully, you could easily wind up with bad credit. For starters, a lot of business financing—and business credit cards, in particular—require a personal guarantee, meaning if you miss payments or start carrying too much debt, your personal credit scores will suffer.

Even if you don’t put business expenses on your personal credit cards, “how you manage the way your business affects your budget in other ways can have an indirect influence over your credit score,” Bruce McClary, vice president of communications for the National Foundation for Credit Counseling, said.

For instance, if you use too much of your own cash to get up and running, you could wind up with too little leftover to cover your personal loans, like a mortgage — and missed loan payments are the quickest way to tank a credit score. Fortunately, there are some steps you can take to keep your credit intact. Here’s how to start a small business without ruining your credit.

1. Set a Strict Budget & Business Plan

That way, you don’t drain your bank accounts and put paying your personal bills at risk.

“Setting a business budget and sticking to it is also important, albeit challenging, at the start of a new venture,” Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions, said. “This includes giving yourself a salary that you don’t exceed.”

You’ll also want to build an exit strategy into your business plan, so if things start to go south, you can get out without doing irreparable damage to your finances and your credit.

2. Avoid Using Your Personal Credit Cards for Capital

Beyond carrying potentially high interest rates, those debts will quickly wind up on your credit reports—and any unpaid balances will become your personal legal responsibility.

“While it may seem a bit more of a challenge, it is best to consider alternative methods of financing,” McClary said. These methods could include “applying for a business loan, working a part-time job to generate operating cash, or recruiting investors who could offer their own money for a stake in the success of your business,” he said.

3. Set up a Proper Business Structure

“We advise owners to keep their personal finances as separate as possible from those of the business,” Nitzsche said. So, in addition to keeping separate bank accounts and lines of credit, you’ll want to make sure structure your business properly.

Establishing an LLC, S Corp. or C Corp. can keep business debts off of your personal credit report. If you are a sole proprietor, on the other hand, your business credit and your personal credit are treated as essentially the same. (As in, you and not the business itself will be liable for any debts.) Consult an attorney or accountant to find the best set-up for you.

4. Comparison-Shop for Small Business Loans

When it comes to a straightforward small business loan, you have a lot of options. Many people patronize their bank or credit union, since that personal relationship can help them secure more favorable terms and interest rates. Small Business Administration loans are also a popular option. SBA loans are made by individual lenders, but there are guaranteed by the government. You can learn more about SBA loan programs on the Small Business Administration’s website.

“Seeking financial help first through organizations like the U.S. Small Business Administration (before using personal credit) is also a great idea,” Nitzsche said.

In any event, it’s important to take your time and do your research to find the financing that is best for you. You can pull your credit reports for free online, and it can help to brush up your credit before you go ahead and apply for loan since a good personal score can help you net better rates.

Author: Jeanine Skowronski is the managing editor at Credit.com. Prior to joining us, Jeanine’s work was featured by TheStreet, Newsweek, Business Insider, Yahoo Finance, MSN, Fox Business, Forbes, CNBC and various other online publications. Follow her at @JeanineSko