According to the Small Business Administration, if you’re using credit to finance the startup costs of your business then you are not alone. As of 2011, 65 percent of business owners were financing at least some portion of their business on a credit card or through a loan of some kind. Building business credit is crucial to the success of a startup long term, but even the SBA admits that’s a difficult proposition for the short term.
Many of these entrepreneurs start with their personal lines of credit, even using credit repair services to remove blemishes and make it easier to request increased credit lines. Here are some facts on why having good personal credit is a major asset as a business owner.
Financing Is Hard to Find
Finding the right lender for a personal loan to start a business isn’t so easy. Big banks are basically a no-go these days. They offer great packages, but even people with excellent credit have a hard time qualifying for them. Today, the pressure on big banks to maintain a capital reserve is quite intense. As a result, it’s harder for them to make smaller loans like $50,000-$100,000 that startups usually need to cover those first-year costs and launch the company.
Crowdfunding Works, But it’s Slow
When you have an idea that needs to go to market, crowdfunding is an excellent way to try and get some support. It’s helpful for a few reasons. It provides potential investors some gauge of interest. If your Kickstarter is doing well, chances are the product will sell decently. They can also help you bring a product to market that is more polished, like a second version that is even better than your original release. It shouldn’t be used to supplement the cash flow you actually need to build the product. Crowdfunding campaigns take time to complete, and you have to expose your idea in the process. You risk others stealing that idea, and if your campaign fails, you have wasted time and won’t be any closer to getting the capital you need to launch.
A personal loan gets you started immediately, so you can manage the crowdfunding campaign and work toward your long-term goals. Crowdfunding can be a very effective component of your outreach, but it shouldn’t be your go-to strategy for startup capital.
Reducing Spending Isn’t a Plan
Reducing the overhead of your business isn’t part of the business plan. You need to spend a certain amount of money on manufacturing, or personnel, or materials, or whatever that secret sauce is that makes your product appealing. Cutting costs this early in the business will just lead to a subpar product release. When you have a strong personal credit score, you can get the funding you need to secure the basics. This doesn’t give you license to inflate your business with amenities that are less than mission critical, but it does give you some breathing room and some hiring power.
Final Thoughts
Launching is the important part of your startup because launching means revenue and a history of paying bills under the business’ name. Having this history, and that small amount of capital (even if you’re not liquid yet), means a lot in terms of securing a business loan. Once you’ve gone six to twelve months paying bills on time, try asking your credit union about any business loan packages that may be available. The Small Business Administration also offers loans for startups, and there are several grants (Federal and private) available for various industries to fund new projects, research and infrastructure.