Note: Everything is Reported
Business Week reports that historically, small business debt had not been reported to consumer credit bureaus, but now that is changing. Although most small business owners have to personally guarantee their business debt, particularly SBA loans, business loans did not affect personal credit unless your account was in arrears. Now the total amount of your business indebtedness may lower your personal credit score, even if you have been scrupulous in keeping up with your payments. This can lower the availability of personal credit that you can access as well as raise the cost of that credit. It is unclear what lenders expect to gain by this reporting. Net delinquencies and charge-offs are rising, so perhaps they wish to signal to small business owners that there are consequences to defaulting. But with personal pledges, guarantees and other assets on the line collateralizing the business borrowing, we already know that. What concerns me, which is why I never completed the SBA loan application process, is that providing personal guarantees exposes liability risk and places other assets, unrelated to the business, in play. With frivolous litigation the norm in the United States, I want to exercise care to ensure that I preserve all of the protection of limited liability by incorporating. I would not wish to forfeit any of those protections to access financing. I note that the large automakers and banks that secured government bailouts did not do so by exposing the personal assets of their executive management. Although, perhaps if they had, you wouldn’t see 38 to 1 leverage ratios and poor management decisions at certain of these companies!