Mr. Dee is into paid employment but has just started a new business entity. He wants to apply for a business credit from a lender, but does not want this credit to affect his personal credit records. He wants the two (2) treated separately, and wants to know what needs to be done and how to achieve it.

Sometimes, being employees in paid employment, it is not impossible you are also an owner of some small business(es) in a bid to either follow other areas of passion or simply to diversify your income sources.

Often times you take money from your personal finance i.e. salaries to fund your small business(es) and even want to guarantee your business loan obligations with your employment status and income.

The continuity and life of your early stage business is still very much associated with your person, presence and financial health.

However, you have applied for a business loan but your lender wants to have a wholistic view of both personal and business credit status, but you are expressing reservations on that move, so how do you achieve this and how do you go about it?

My response will be from this piece from The Experian, hope you find it informative.
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Dear RCH,

• The key is to not use your personal credit to finance your business purchases.

For example, it is not uncommon for small business owners to secure business loans using their personal credit, or to use personal credit cards to purchase office supplies or equipment. Doing either one typically results in those financial obligations being reported in your personal credit history.

To completely separate the two, you must establish your business as a legal entity that does not hold you personally liable for the debts of the business. There are number of ways to incorporate or structure a small business. I suggest you consult with your attorney or perhaps a state or local government office where you live for advice in that regard.

As your business applies for and receives credit, a business credit report will be established. That report will then act as the primary tool for determining whether or not you are approved for business credit.



If you are personally liable for any debts such as in a sole proprietorship, it is not uncommon for potential creditors to check both your personal credit report and your business credit report. That is because there is a proven, strong correlation between the personal credit histories of small business owners to the business credit performance, particularly in the early years of the business.

Studies have shown that if small business owners begin to have problems with their personal credit, it often quickly translates to problems with their business credit.
For that reason, lenders may review your personal credit as well as your business credit when you apply for business purposes. This is especially true if you are using your personal credit as security for the business loan.

- The Experian

Hint:

 Small Businesses can be incorporated in other forms such as Corporations and Cooperatives where you have limited liability of the promoters for the debts of the business.

 Sole proprietorships and partnerships, where you have unlimited liability for the debts of the business.

However, the business owner can also be held responsible for corporate or LLC debts in certain situations. Below, we discuss how this can happen.

1. Personally Guaranteeing Business Debts
If you guarantee on a business loan, you are liable in your personal capacity as much as the corporation or LLC to pay back your company’s debts.
Then the creditor can come after your personal assets and sell them to satisfy the obligations of the company where the business defaults on the loan, where you have pledged your Property as Collateral.

2. Pledging Your Property as Collateral
You may wonder why your guarantee comes up in the first place, but it happens mostly in cases, where the company is new or does not have as much asset(s), thereby making a creditor request from you as the business owner(s) the provision of some sort of collateral (houses or some personal assets) before approving the credit facility.
If you agree to pledge your house or other personal assets as collateral for the business loan, the creditor may be able to take your property and sell it to satisfy the obligations of the company.






3. Removing the Corporate Veil
However, a creditor can also break the corporate veil, hold you responsible for your business loan obligations in cases of default, and try to go after your personal assets by eliminating the limited liability protection provided by the corporation or LLC.

Where the creditor can prove that the corporation or LLC was a shell created only to provide liability protection for its owners or the company was practically inseparable from or an alter ego of its owners.

Courts will be more likely to break the corporate veil if:

a. Corporate formalities, such as holding annual meetings and keeping minutes, were not followed.
b. Certain owners exerted too much control over the corporation or LLC.
c. Owners commingled personal funds with company funds or used personal funds to satisfy company obligations.
d. The company was not sufficiently capitalized when it was formed.

4. Fraud
There will be personal liability for a business debt where it can be established that they are found to have committed fraud. Where there are fraudulent representations or deliberate omissions during the application for a business loan, with a prior intent to defraud the creditor and eventually resulting to harm of the creditor and risk losing personal assets.

On the other hand, if a corporation or LLC was created as a special purpose vehicle to further a fraudulent business, a court of law can break the corporate and go after the owners of the business and hold them personally liable.

Sources:
1. http://www.experian.com/ask-experian
2. http://www.canadabusiness.ca/eng/page/2853/
3. http://www.nolo.com/law-authors/baran-bulkat.html