Looking for small business access to credit for financing a start-up or building a business need not be intimidating. Funding and credit is available to entrepreneurs if they know where and how to look for it.
Small business owners have a variety of options from which to choose. Grants, loans, personal savings, and credit cards are a few of the avenues to explore when looking for business funding and access to credit. Before looking for credit options it’s important to prepare a business plan with a detailed cash flow analysis. Your business and financial plans are tools that professional lenders will evaluate in their credit decisions.
Small Business Access to Credit Explained
Each financial situation is unique. Not all of the available credit options will appeal to or be available to every small business owner. Successful entrepreneurs have used creative financing for years to finance their businesses until the business earns enough to survive on its own.
Below are some of the types of credit and financing that have been successfully used for both start-ups and growing a small business:
- Personal Financing: Personal funding is not credit, but comes from a variety of sources, including personal savings, sales of assets, or inheritances. Personal financing is the safest way to finance a business, but few entrepreneurs have the means to completely fund a business themselves. Most turn to one or more of the available small business access to credit options.
- Home Equity Loan: If you own a home, you can apply for a home equity loan to finance your business. Home equity loans are low-interest and use your house as collateral. Home equity loans are risky because the inability to repay the loan could result in losing your house.
- Family Loans: Small business owners may be able to borrow from family members or friends. Loans from family members and friends should be treated as legal obligations, complete with written and signed term agreements.
- Credit Cards: Personal credit card accounts can be used to help finance a business. Credit card financing is a risky practice. Late fees, interest payments, and penalties can quickly make repaying the balance impossible. Credit card financing should be a last resort when searching for funding.
- Micro Loans: Loans that are $35,000 or less, specifically designed for start-ups or newly opened businesses are called micro loans. Administered through local non-profit lending organizations, micro loans are funded by the Small Business Administration (SBA). Micro loans require some type of collateral and most lenders require repayment in six years or less. Some lenders may require proof of business training before loan approval.
- SBA Small Business Loans: Acquired through banks, credit unions, and savings and loan companies, small business access to credit loans are funded by the SBA. Loan applicants must meet specific requirements set out by the SBA. The SBA guarantees repayment of the loan, making it less risky for the lender.
- State and Local Small Business Loans: States, local communities, institutions, and organizations often offer low interest loans as incentives for business start-ups. Some of these programs do not require bank approval.
How Credit Scores Impact Small Business Access to Credit
Business loan lenders use a variety of methods to ensure that the money they lend will be repaid as promised. One of the most important factors they consider is your personal and business (if you have one) credit score.
A history of on-time payments and smart money management has several advantages when looking for small business access to credit. A high credit score typically results in lower interest rates on loans. Lenders look for a history of financial stability, making loan approval easier. Late payments, unpaid debts, and low credit scores are red flags for lenders and often result in loan applications being denied.
If there are problems with your credit, it is still possible to find financing. Some lenders will look at extenuating circumstances and causes of past financial problems. Prepare to pay higher interest rates if approved, however.
Wise use of one or more of the small business access to credit options is a great way to start building a solid business foundation.