Tax-Trap: Funding Risk-Credit Repair

As a business owner myself (with four companies under my belt), I get it. The stress of tax season is real. The temptation to minimize your personal tax liability is strong. But here's a hard truth, especially for small business owners and entrepreneurs: aggressively reducing your personal income on your tax returns can seriously sabotage your ability to secure business financing.

The Underwriter's Eye: Your Personal Taxes Matter

Whether you use an accountant, tax software, or do it the old-fashioned way, remember this: banks and FinTech lenders will scrutinize your personal tax returns. They'll typically ask for the last two years of both your personal and business returns. And even if your business has some established credit, many lenders still want to see your personal tax returns. They'll also often request personal and business tax transcripts during the underwriting process.

Why? Because they're assessing your personal ability to repay the loan, especially if your business is young or has limited credit history.

The Pitfalls of Underreporting

Here's where the problem arises:

• Sole Proprietorships & LLCs: If your business is structured as a sole proprietorship or an LLC, your personal income is directly tied to your business's profitability. Lenders know this.

• Debt-to-Income Ratio: Underwriters calculate your debt-to-income ratio. If you're seeking a substantial business loan (e.g., $500,000 with a 10-year term) and your personal tax return shows a meager income (e.g., $20,000), they'll see you as a high risk, even with good personal credit and healthy business revenue.

The Real-World Consequence

As a former business loan broker, I've seen it firsthand. Solid business owners with great personal credit and thriving businesses get turned down for affordable loans because they artificially deflated their personal income to minimize taxes.

This forces them into the clutches of predatory lenders offering:

• Merchant cash advances

• Payment processing funding

• Accounts receivable financing

• Loans secured by business equipment

These funding options come with:

• Exorbitant interest rates

• Unfavorable repayment terms

• Crippling fees

They can strangle a business's cash flow, hinder growth, and even lead to insolvency.

The Ten Dollar Credit Repair Perspective

At Ten Dollar Credit Repair, we understand the pressures you face. But we urge you to take a long-term view.

• Accurate Reflection: Ensure your personal tax returns accurately reflect your income. A healthy business should translate to a healthy personal income for the owner.

• Prioritize Debt-to-Income: Remember that a strong debt-to-income ratio, supported by realistic personal income, is a cornerstone of securing affordable business financing.

Don't let tax avoidance strategies today jeopardize your business's financial future tomorrow.