They say debt, especially significant debt, stays with you. While that’s certainly true of your personal credit and finances, many don’t realize it’s also true for business-related ventures. Your personal debt can and does affect your small business.
Poor credit scores, uncollectible accounts, defaulted loans, tax problems and other financial issues can carry over into your small business, and they may even lead to bankruptcy or ruin. For some, the issue results from poor budgeting or ineffective financial management. For others, it denotes the inability to keep personal and business finances separate.
Whatever the case, it’s important to understand how and why personal debt can influence the success — or failure — of a small business.
Financial Problems That May Influence Your Small Business
As is the case with your personal credit score and financial status, there are a few actions and inactions that may cause issues:
- A mediocre to poor credit score, including a nonexistent one.
- An overextended credit line, which may include too many active credit cards.
- A history of late or missed payments.
- Frequent or numerous hard credit checks.
- A credit utilization rate that’s either too high or too low.
- A history of failed ventures or previous financial business problems.
- Defaulted or active loans with high values.
- A mortgage or leased property that is not paid off.
While some of the aforementioned issues are more serious than others, it’s your financial history’s collective status that really matters. For example, you may have a high mortgage, but if your payments are always on time and you have a reliable history, then it’s a non-issue.
How Personal Debt Can Affect Your Small Business
Now that some of the more common problems have been laid out, it’s time to address how they can affect a small business. Some hinder the start or initial phases of an entrepreneurial project, while others can haunt you for your entire venture. Here’s how they work:
1. Lenders and Investors Will Review Your Credit Score
Without a significant amount of cash or capital funds, most owners will turn to other funding options, such as a loan from a bank or lender. The money could be used to build a store or office, rent a property, purchase initial supplies or equipment and much more.
However, banks, lenders and investors alike will consider your personal history, particularly your credit score. They will look for past failures and bankruptcies, cash flow or liquidity problems and outstanding debt. Any sign of poor financial management can be considered high risk, which would paint you in a negative light.
For loans, a higher credit score also offers the bank more incentive, making them more likely to grant funds and increase the loan amount.
It may seem like this is a problem isolated to startups and newer businesses, but that’s not the case at all. In reality, many small companies acquire loans later on in their growth to expand operations, renovate or upgrade locations and more. Without the ability to take out a loan, growing an organization is a lot more difficult.
2. You Will Lose Access to Equipment Opportunities
Whether you’re purchasing or leasing equipment for your company, a poor financial status can considerably ruin your chances. Some equipment providers may refuse to do business with you altogether. Others may charge inordinately high fees and interest.
For something like a lawn care business that requires a lot of equipment to complete projects, the inability to buy or lease can be detrimental. Worse yet, it may severely limit the types of machinery you can choose from, forcing you to acquire used or subpar gear. That can also influence the quality of the services you provide.
3. Poor Finances May Affect Product Supply
In many cases, suppliers will extend credit to the businesses they work with, particularly for purchasing goods. They might also establish a system where goods are automatically transferred or entrusted to an enterprise. Those opportunities are often rescinded or just not possible when you have poor personal credit and financial history. Companies usually have an allowance for credit losses, yet they still try to mitigate encounters.
Even when a supplier agrees to work with a poor credit history, many limitations can create friction. For instance, they might put a cap on how many goods they entrust you with. Moreover, they might raise their cuts or add interest to transactions because of the higher risk. They could even ask that you pre-pay invoices, which can make budgeting much more complicated.
A poor financial and debt history severely limits the suppliers you can work with, and even then, it weakens the relationships you establish.
4. Customers May Find Out and Move On
For one-off products and goods, it’s not necessarily a huge deal when a business owner has a poor financial history or massive debt. Of course, the exception is when a product or service requires extended support, which can go away if a business fails or goes belly up.
A lack of support, or at least the risk of it happening, is a major reason why customers will avoid doing business with a company — especially a service-related one. An overwhelming 90% of Americans use customer service and support as a factor in their decision to do business with a company.
If your business is failing, especially because of personal debt, then a customer service program is likely nonexistent. Consumers know better, and any customers that do support your small business will catch on quickly.
5. You May Be Forced to Sell Out
As debts and financial issues continue to rise, you may find yourself face to face with a conundrum. Risk bankruptcy and financial ruin, or sell the business to a more capable party. Selling the enterprise is the ideal option, obviously, and may actually help save your credit and financial status. Except, there will be fewer buyers looking to acquire a company that’s in the hole.
It’s yet another negative of dealing with a poor financial status. A business in the green that’s bringing in profits may attract better, more willing buyers.
6. Debt Can Kill Your Brand or Company’s Value
Let’s say that, for quite some time, your business or brand has been doing well. It’s in the green with high profits and sweeping success. It’s likely taken a long time to reach that milestone. All of that can be for naught with significant debt — particularly personal debt that starts eating into a small business’s reputation and value.
Any value you might have earned over time can quickly be lost due to an uncontrollable debt. That lost reputation can end up being irreparable, too. That’s why it’s important to get your finances in order before starting a new business by using methods such as paying the highest-interest debt first. It’s also essential to keep on top of those finances throughout a venture.
Tax Mistakes Can Compound Financial Problems
You will be responsible for both your personal and business-related taxes. Tax fraud, complications and even severe loan debt can create some serious problems for your company over time:
- The Internal Revenue Service (IRS) can incur tax liens against your business properties and assets.
- Outstanding debts, tax dues and fines will all continue accruing interest.
- Failure to solve or remedy these problems may result in bankruptcy and the loss of your entire business.
You must deal with any tax issues that arise as soon as possible, even if you have an excellent credit score.
Get Your Finances in Order
As you might expect, the final point is that any debt issues, personal or business-related, should be taken care of before embarking on a new venture. Of course, that’s difficult to do if a venture is already underway, or if you’ve had a business for years. However, because debt removal is a vital component of operating a successful business, the point still stands.
Luckily, there are some things you can do:
- Evaluate what you owe and prioritize payments.
- Renegotiate contracts and refinance properties.
- Collect client or customer payments more quickly.
- Increase the cost of goods or services.
- Sell unused or unnecessary assets.
- Find investors willing to offload some of the risk, if you don’t already have any.
- Strike up a partnership.
Ultimately, lowering debt is the true goal, and it should always be a priority for every business owner.
