Or does it? Actually, it all depends on how you acquired your business credit.

Setting The Scene

This whole scenario begins with your business. You take out a small business loan to get started on whatever type of business you have decided to embark upon. So far it sounds like it could be a smart move. Opportunities seem limited in the business world for those trying to work their way up the ladder so why not create your own opportunities?

The story continues as you begin your own personal line of business credit and perhaps acquire a few business credit cards to cover any expenses that pop up. Then the economy takes a turn for the worse. Business is bad and soon these lines of credit are pushed to the limit just trying to keep your business going.

It could go so far that you have no choice but to start over and that your business files for bankruptcy. It is not a story with a particularly happy ending, but it is an ending. Or is it?

It’s Not Over Yet

This should be the point at which you begin your new life with the lessons you learned and find a new way to support yourself. Your small business may not have survived the times, but you handled it the best way you knew how. These things happen.

Then collection agencies start contacting you about paying off all those defaulted credit lines and credit cards from your old business. You thought that because it was business credit that you would not be held personally responsible. You could be wrong.

Sometimes to get small business loans, lines of credit, and credit cards you have to use your own personal credit to apply for them. If you do this then you have given a personal guarantee that if anything happens to your business that you will be held personally responsible for its debt.

How To Protect Yourself

The way to protect yourself is to not personally guarantee business credit or credit cards. If you do this then you will be responsible no matter what happens. If you do not want to be personally responsible for your business’s debt then do not give this personal guarantee.

Do not run your business as a sole proprietor. In most cases if you want to obtain access to business lines of credit without providing that treacherous personal guarantee then you need to set up your business as a separate legal entity. This could be a limited liability company or a corporation. You just have to be separate legally.

Whenever you are performing financial transactions or opening lines of credit for your business, never use your social security number. This will give you that personal responsibility that you are trying to avoid. Instead use your business’s Federal Tax Identification Number or Employer Identification Number. These will keep personal responsibility separate from business debt.

Your business credit could hurt your personal credit if you are not careful. As optimistic as you want to be about your business, do not put your own credit on the line if the business does not work out. Knowing this before you start your own business will protect you if your business does not work out the way you hoped.