One in four small business owners use personal guarantees

The findings come from an Equifax Canada survey that looked at how business and personal credit intersect.

A new survey shows that a significant portion of small business owners tie their personal finances to their companies, creating potential vulnerabilities.

Financial exposure and guarantees

26 percent of Canadian small business owners have been required to provide a personal guarantee to secure business financing. This practice puts personal assets like savings or a family home on the line. The findings come from an Equifax Canada survey that looked at how business and personal credit intersect.

About 21 percent of owners opened a personal line of credit for their business during the past two years. For 45 percent of those who used a personal line or guarantee, doing so has impacted their personal finances. Common effects include reduced personal credit availability at 20 percent, greater difficulty qualifying for a car loan at 20 percent, difficulty obtaining other personal credit at 15 percent, and difficulty qualifying for a mortgage at 13 percent.

Younger business owners face a higher burden. 54 percent of owners aged 18 to 34 have provided a personal guarantee, compared with just 15 percent of those 55 and older. The same younger group was also more likely to turn to personal lines of credit as a financial safety net. The data shows these owners carry credit utilization that is 31 percent higher than consumers, with balances that are 105 percent higher on their personal credit profiles.

Monitoring business credit

Despite this exposure, many owners are not fully aware of their business credit standing. 15 percent do not know how to access their business credit report, and 10 percent were unaware their business even has a separate credit profile. Finding or retaining customers was the most cited challenge at 53 percent, followed by rising operating costs at 48 percent and a lack of capital or cash flow at 30 percent.

However, interest in monitoring is growing. 64 percent of surveyed owners expressed interest in monitoring their business credit score through their bank’s commercial banking platform. That interest jumps to 86 percent among owners who checked their report within the past year. Owners under 55 are more proactive in this area, with 74 percent showing interest, compared to 52 percent of the older demographic. Brown suggested that understanding a company’s commercial credit profile helps owners see how lenders may view them.