Small businesses often struggle with securing funding, which was highlighted by a survey from the Federal Reserve’s Small Business Credit Survey. It showed that 34% of small business owners find it difficult to manage debt payments. Additionally, only 51% of applicants were fully approved for the funding they sought. More worrying is that 53% resorted to using their personal funds to tackle financial issues, risking their personal credit scores.
Thankfully, using business credit instead of personal credit offers several benefits for small business owners, promoting healthier financial growth for both the entrepreneur and the business:
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Safeguards Personal Credit: Business credit keeps your personal finances separate from business finances, protecting your personal credit score from business-related financial troubles. This separation also makes it easier to secure personal loans for things like buying a house or car.
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Reduces Personal Liability: Relying on business credit can limit your personal liability. If your business faces financial difficulties, your assets like your home or retirement funds remain safe.
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Builds Business Credit: By obtaining funding through your business, you build its credit history. A strong business credit profile can help secure larger funds and more favorable terms later, driving growth and expansion.
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Offers Tax Benefits: Interest payments on business loans can often be deducted from taxes, a benefit that personal loans don’t provide, helping reduce taxable income.
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Provides Better Loan Terms: Business loans usually come with better terms than personal ones, such as lower interest rates and higher credit limits.
It’s crucial to avoid high-interest loans if they seem like your only option, as well as accurately estimating how much capital you need before applying. Mistakes in these areas are common and expensive for small business owners. Make sure you know exactly how much funding is necessary when you borrow, as running short later can complicate things.
An overlooked opportunity for small businesses is alternative funding, involving creditors and products that aren’t traditional banks. Surprisingly, only 8% of businesses reported using non-bank financial services. Alternative funding is a great way to get more credit than traditional banks can offer, without the usual paperwork and income checks that can be frustrating. This includes options like business credit cards, contributions from friends or family, crowdfunding, venture capital, angel investors, grants, and private lenders.
A particularly interesting strategy for small businesses is Capital Stacking, which involves applying for multiple business credit cards strategically to maximize available credit. This method, if done correctly with professional guidance, can provide a substantial capital influx while still protecting your personal credit. It’s well-suited for startups because it doesn’t require a financial history to start. Capital stacking can provide up to $200,000, giving a big financial boost to any business. If you don’t qualify alone, partnering with someone who has good credit might be an option.
This strategy involves entrepreneurs applying for several business credit cards, ensuring each application addresses different credit bureaus to secure the highest possible credit. Many cards offer low or no interest for the first 6-24 months, providing a valuable opportunity to utilize and repay credit while building a solid payment history, which helps with future funding.
To begin, good personal credit is essential—a score of 680 or higher with no open collections or late payments. While personal credit gets you started, the ultimate aim is to establish business credit independent of your personal score. Most importantly, ensure you are capable of handling the new debt responsibly. The key is to effectively manage the new funds, not necessarily to spend all that is available.
