Small businesses face unique challenges when it comes to securing funding, underscored by a recent survey from the Federal Reserve’s Small Business Credit Survey which found that:
- 34% of small businesses said making payments on debts was a financial challenge.
- Only half of applicants (51%) were fully approved for the financing for which they applied.
More troubling is that 53% said they used personal funds to respond to financial challenges. That’s a huge risk, as any negative impact from the business will impact your personal credit score. Fortunately for small business owners, the advantages of leveraging business credit over personal credit are multifold, and can ensure better financial health and growth potential for both you and your business:
- Protects Your Personal Credit: By using business credit, you are separating your personal and business finances. This separation protects your personal credit score and reputation from being impacted from the business’s financial activities, making the process easier for securing personal loans for buying a car or home for example.
- Limits Personal Liability: Using business credit rather than your personal assets limits your own personal liability. If your business runs into financial difficulties, your personal assets like your home or retirement account remain protected.
- Build Business Credit: By securing funding through your business, you are building the credit history for your company. Having a strong business credit profile can help you secure larger funding amounts and better terms in the future which in turn fuels further growth and expansion.
- Tax Advantages: The interest payments on business loans are often a tax deduction, a benefit that personal borrowing does not offer. This helps reduce your company’s taxable income.
- Better Terms and Conditions: Business loans and lines of credit typically offer better terms and conditions compared to personal loans and personal credit cards. This can include lower interest rates and higher credit limits.
Important to note that what you don’t want to do is take a super high-interest loan because you think that is the only available option you can qualify for. Also, another common mistake is misjudging funding requirements, which is often cited by small business owners as a huge unforced error. As well, before starting any loan process it is imperative to have an accurate assessment of how much capital is required and how it will be used. Once you have borrowed money you cannot come back immediately if you realize you did not take enough!
One business credit option very few small businesses think about pursuing is alternative funding, which means using products and creditors that are not traditional banks. Indeed, the Fed survey found that only 8% of small businesses report using a financial services company that is not a bank.
This is surprising, as alternative funding can be a great way to free up much more credit than traditional sources, without jumping through the paperwork and “standard” income verification hoops that often frustrate entrepreneurs. Sources of alternative funding include business credit cards, friends/family, crowdfunding, venture capital, angel investors, grants, and private lenders.
Now of great interest to small business owners is Capital Stacking, a process of strategically applying for multiple business credit cards to maximize your available credit. Done right, it can offer a vital capital infusion while protecting your personal credit. It’s a bit like playing chess, where every move needs careful planning and expertise which is why it should only be done with the help of professionals who know how it all works and more importantly how to get you the best results.
What makes capital stacking particularly appealing for startups is that it doesn’t require any financials, making it an excellent choice for businesses without extensive financial histories. Additionally, capital stacking can offer amounts up to $200,000, providing a substantial boost to any business’s financial resources. And for business owners who don’t qualify, using a credit partner is a viable option.
Here’s how it works: Entrepreneurs apply for several business credit cards, ensuring each application hits a different credit bureau. This strategy helps secure the highest credit. Many credit cards offer low or no interest for the first 6-24 months, providing a golden window to use and repay credit, building a strong payment history along the way. This will help with additional funding in the future.
To get started, good personal credit is essential (think a score of 680+, no open collections, and no recent late payments). While personal credit is the entry ticket, the end goal is business credit that’s separate from your personal credit. And of course, the most important thing is that you are capable of making payments on any new debt you take on. The goal here is not to immediately pay every cent that is offered.###
Sara Weldon is a serial entrepreneur and co-founder of TruFinCo, a fintech company helping small businesses and real estate entrepreneurs find alternative sources of business funding.
Funding stock image by Andrey_Kuzmin/Shutterstock
