Funding Options For Your Small Business Without Ruining Your Personal Credit or Sabotaging Your Business Success
There are many options to fund your business start-up or growth: raising money from friends and family, going the venture capital route, using your own savings, or even pursuing crowdfunding. One option that too many business owners rule out, or make poor decisions around, is using credit to fund your business.
Credit, heck let’s not beat around the bush here — DEBT, yes, that four letter word — can be one of the best ways to finance the start-up or growth of your business.
Unfortunately, there is so much bad information, fear-mongering by financial educators, and inherited shame, guilt and fear around the use of debt that most of us are simply not set up to use it wisely.
And, it’s true, if you use credit to fund your business and you do it wrong, you can ruin your credit score quickly and set yourself back years while you clean up and repair. Or in some cases, you can even take yourself out of the game completely, too scared to get back on the horse and ride again.
But, have no fear, I’ve charted the path for us. I went the long way around, got lost several times, used my trusty magical machete to forge new paths, and all of it so I could circle back to you with all the information about what’s real and true, and what’s not, when it comes to using debt to start or fund the growth of your business.
My Shame, Guilt and Fear Around Using Credit Caused Me To Make Very Poor Decisions
When I first started out in business, I hung my shingle as a solo lawyer, and thought I could just build my law practice out of the revenue I would bring in.
But first, I needed some things in order to bring that revenue in, like a desk, a computer, and office supplies. And I didn’t have the cash to buy those things. So, I used my personal credit card to buy what I needed, not knowing there was any other option.
Then, as the work started coming in, I needed more things, like to hire an assistant, upgrade my homemade website, and hire consultants and coaches to help me figure things out — like how to get hired when people came in to meet with me — that would support my business growth. But, my revenue didn’t justify it.
I felt stuck and confused.
How was I supposed to grow my business without going into debt? I watched a lot of Suze Orman back then, and she said stay out of debt. Then, Dave Ramsey came on the scene and he said never take on any debt, and if you have it, get out of debt as quickly as you can. All the mainstream financial educators I was learning from seemed to be saying I would need to finance the growth of my business out of the revenue I was earning, but I quickly saw that this was not actually possible, if I also wanted to have a life worth living.
I was already maxed out on my time.
If I followed their advice, I would never be able to grow my law practice into a business that would create any measure of freedom for me. Instead, I’d be stuck in the perpetual “practice” working all hours of the day and night, weekends too, and providing a sub-standard service to my clients and not able to parent my kids the way I wanted, with presence and attention.
So, with shame, guilt and fear, I began to take on debt. Because I was uneducated in this area, and didn’t know where to turn for guidance, I made a huge number of mistakes along the way. You can read the gory details of those mistakes here.
You Can Wisely Use Credit to Build Your Business Without Shame, Guilt and Fear
After being in business for more than 15 years, and experiencing the full range — from solo law practice to a million dollar law firm to building multiple million dollar businesses and taking on more than $500k of debt, then filing bankruptcy, and then rebuilding it all from scratch into a thriving enterprise that just hit the Inc. 5000 for two years in a row — I can tell you that credit, when used wisely, is your friend.
Unless you want to remain a freelancer, which is pretty much a perpetual job with no benefits and limited freedom, you will need to invest in technology, team and other infrastructure, most likely before your sales dictate needing any of it. It’s by creating the infrastructure that you create the capacity to make the sales.
If you try to make the sales before you’ve invested in the capacity to deliver, you’re going to find yourself trapped in a vicious cycle of over-promising and under-delivering or working like a mad woman to keep it all going.
If you wait to invest until your sales justify it, you’ll be behind the 8-ball, constantly sprinting to catch up, and it will be very difficult to hire and train people when you are literally working like a crazy person.
So, if you are seriously committed to growing your business with the infrastructure, team and technology it needs to offer a stellar service or product, you’re going to need to put money in before you have it coming out. Oh, and yes, don’t forget what it will cost you to try and test marketing strategies and learn to sell.
And, yes, you’re going to need money to start or grow your business. And, no, you should not use personal credit cards to fund the growth of your business. If you are already using personal credit cards, and your credit score is still good, now is the time to shift to business credit and pay off the personal credit cards.
Using Personal Credit Cards or Sales to Fund Your Growth Will Keep You in a Cycle of Scarcity, Over-Promising and Under-Delivering
Attempting to fund your business out of revenue, or by using your personal credit cards, will keep you trapped in a cycle of scarcity, not enoughness, and constant fear of running out. These types of energies in your business do not lead to success, even if you are able to make some money along the way. You won’t be able to attract the team support you need, or you’ll attract good people and then lose them because you aren’t able to pay them enough or because you are energetically draining to be around due to your constant fear of running out of money.
And, if you’ve ever tried to sell from a place of need, you know how that goes. Potential clients or customers can smell the scarcity, and even if they need what you offer, they’ll find some reason not to hire you or buy your products.
You’ve heard the saying “if you build it, they will come.” Well, it’s really true. If you’ve got something great to offer and people really do need it, invest in building it, and they will come.
The opposite is also true. If you do not have the capacity to serve your clients or customers well, they will not come. Or, if they do, you’ll end up with poor reviews as a result of not being able to deliver.
It can seem like a catch-22. You need to make sales to bring in revenue to fund investments in marketing, team, technology and your own learning. But, you need marketing, team and technology to make the sales.
Bottom line: if you want to build a real business, you’re going to need capital. If you are trying to finance your start-up and growth out of revenue because you are scared to raise money, or use credit, you will always be one step behind.
Business Credit Cards at 0% Interest Are a Far Better Solution
Credit is a great way to finance your business, but there is a right way and a wrong way to do it. When you do it the right way, credit is a superior funding source because you do not have to give up equity in your company to get it, and you are in full control of the use of funds.
The wrong way of using credit will max out your personal credit cards, hurt your credit score, stress you out, and make it more difficult for you to obtain credit in the future.
Once you’ve used over 35% on any one of your personal credit cards, your personal credit score will begin to decrease. Once you’ve maxed out your personal credit cards, you probably cannot get anymore credit. And, in some cases, the credit card companies may even decrease credit lines they’ve given you already, starting an ugly cycle of being trapped by debt that you can’t get out of.
The right use of credit to finance your business will maintain or improve your personal credit score, while getting you access to up to $250,000 of “unsecured” business credit, much of it at 0% interest for 6–18 months. Unsecured means that you don’t have to put up any collateral to get it. However, it is still tied to your personal credit score, meaning if you don’t pay it back, it will hurt your personal credit score and you are personally on the hook for paying it back, even though it’s unsecured.
If you have over a 720 credit score, or can get it there using credit repair strategies, you can access business credit, instead of using personal credit cards to fund your business. And, it’s way better to do it that way.
The best part of using business credit cards to fund your business is that you can max out your cards, meaning use the full amount of credit available to you, without hurting your personal credit score, so long as you are making your minimum payments on a timely basis. And, in many cases, you can get 0% interest for 6–18 months per card.
If you are considering using business credit cards to finance your business, don’t go it alone. Instead, watch this webinar on the best way to get the most credit at the lowest interest rates. In the webinar, we’ll explain when and why it makes more sense to work with a trusted business credit card funding company than to apply for business credit on your own.
But, what about business loans, business lines of credit, and corporate credit? Are they better than business credit cards?
Business loans, lines of credit, corporate credit and business credit cards are four very different resources, and each of them important to understand.
Business Loans: typically a business loan is made to your business, through your bank, via the bank itself or the Small Business Administration (SBA). A business loan generally requires you to be in business for more than 2 years, and show good income in your business over those 2 years. If your business meets the criteria, your banker can help you fill out the paperwork for a business loan. Personally, I have never been required to create a business plan or proposal for an SBA loan, though I do know that some business owners have, so talk to your local banker to see exactly what’s needed for your business, if you pursue the business loan route.
Your business loan will be for a specified amount, to be determined by you and your banker. Upon approval of your loan, the bank will deposit the full amount of the borrowed amount into your bank account and you’ll begin repaying the loan immediately, under the terms provided by the bank.
Fundera, a website that helps you choose which credit source to use to fund your business, has a comprehensive write-up of the various business loan rates, through banks, online services and the SBA, here.
I just started talking to them myself so I can understand how they make money helping small business owners, and whether there are any downsides. It seems that they get paid by the lenders themselves, not by you, which is a positive.
Obviously, you will want to find the business loan with the lowest interest rate (or Annual Percentage Rate, known as APR), low or no costs up front, and the longest term for payback. And a service like Fundera can help you do that with minimal leg work.
One item of note already is that they said if you are going to use business credit cards, you would just apply directly through their site. That’s fine if you only need less than $15,000 or so. But, if you want more, you really shouldn’t go it alone.
If you are going the business credit cards route, I recommend you watch this webinar so you understand why it makes more sense to get help when applying for business credit cards. Short answer: if you go it alone, you’ll only get approved for a small amount. With help, you can get between $100,000 and $250,000.
Business Lines of Credit: A business line of credit is very similar to a loan, in that you obtain it through a bank and it will generally have the same requirements as a business loan. The difference is that with a line of credit, you are able to leave the money loaned to you in your account, and so long as it’s there, you will not need to pay interest on the loaned amount. With a business line of credit you only pay interest on the amount taken out of your account to pay for goods or services.
Both business loans and business lines of credit do require you, or another owner or officer of your business, to personally guarantee that the loan or line of credit will be paid back. This means that even though the loan will not report on your credit score or impact your credit score so long as you are making payments, if you do not make the payments, you will be personally liable. If you are personally liable, your credit score will be negatively impacted if you do not make payments, and you would be subject to a lawsuit by the lender and judgment against you to collect payment.
Every established business should have a business line of credit to back it up, once it is able to qualify to get one.
Business Credit: Accessing business credit via business credit cards can get you the most funding, at the least cost, in the shortest amount of time. But it’s only the right path for funding IF you are clear on how you are going to earn money by selling your products or services within the 6–18 month time period you’ll have zero percent interest. After that, your interest rates can get extremely high, even over 25% in some cases.
Once you have identified your market and you know they want your products and services (ideally because you’ve tested the market), you can use business credit to fund marketing investments and build a sales process, knowing you can repay the credit through sales as a result of your marketing and sales.
The best part of using business credit is that you can use as much credit as is given to you without putting your personal credit score at risk, so long as you are making your minimum payments on time. Business credit card companies do use your personal credit score to determine whether you qualify for credit, but then do not report the cards on your credit report.
If you are deciding to use business credit, while you can apply to obtain business credit on your own, if you want to get the most credit possible, you should not go it alone.
But, if you only need or want a small amount of business credit, you could just apply on your own for the business credit cards of your choice. You should be able to obtain between $2,500 to $15,000 on your own, with some cards at 0%. If you want more than that, watch this webinar.
Corporate Credit: Corporate credit is credit issued to your business that does not have to be guaranteed by you as the business owner. All three of the other types of credit written about here, do require a personal guarantee by you, as the business owner. This means that if you are able to get corporate credit, and your company is not able to repay the credit extended, you would not be required to pay back the debt yourself. So long as corporate formalities of the corporation were maintained, the lender could sue the company, but not you personally, and the lender would be limited to a judgment against the assets of the corporation, if any.
Corporate credit requires a strong Paydex score. Your Paydex score is like a personal credit score, but it measures the credit worthiness of your business, not of you as an individual. Building a Paydex score can take some years, and requires you to take several steps that indicate your company’s creditworthiness. Read this article to learn how to establish and then increase your Paydex score.
Making wise choices about how you choose to fund your business are oftentimes make it or break it in business. And, unfortunately, there’s a lot of “noise” out there about why you should never use credit, scaring many people away from the best funding sources available.
When used wisely, credit is the best resource for funding your business, and the financial educators who say you shouldn’t use it are saying it because they think you aren’t smart enough to use it. Prove them wrong. Get educated. Get wise. Claim your sovereignty. You are enough. There are enough resources for you. And, you deserve to have a life of freedom and do the good work you came to do.
If you do not want to borrow money, take risks, or learn to handle the financial reality of a business, there’s no shame in having a job and taking the “safer” route of getting a steady paycheck. In that case, it’s true, you should not use credit because your income is not in your control. But, if you are building a business with a service or product you believe in, business credit really is your friend.
Go here to watch the webinar on how to get up to $250,000 of business credit for your business. And, after you do, if you have any questions, join us in the Eyes Wide Open Tribe Facebook group, where I help you make choices about how to create your life and business, awake, aware and on your terms.