The Cost of Not Having Business Credit
What is Business Credit?
Business credit is credit in a business’s name. It is directly connected to a business’s ability to pay its bills on time and in full. It does not relate to the business owner’s personal credit, even if the business has only one owner. As a result, personal and business credit scores can be very different.
But What if You Don’t Have Business Credit?
Did you know not having business credit can be costly? Let’s look at what it can cost you to not have business credit, because it could end up being unaffordable.
Without Business Credit, how is Your Company Funded?
You are going to need startup and other funding for your business. If you can’t borrow under the creditworthiness of your business, what can you do? There are some options that don’t involve establishing business credit, however they are ultimately riskier and more time consuming.
Without Business Credit You Can Try Getting a Traditional Bank Loan
With no business credit, a lender will look at your personal credit and personal assets. You will most likely need to provide a personal guarantee, which means your personal assets, like your house, are on the line. There could be a hard inquiry on your personal credit, which makes your FICO score go down. A bank wants to make money on its loans, so without business credit they will consider a loan to you to be riskier. They want to be paid back without business credit, so they are less likely to believe you will make good on your promise to pay back a loan. A lender will cover itself with higher interest rates, higher fees, and shorter payment terms.
Without Business Credit You Can Try Using Personal Credit
Using personal credit to fund your business is a terrible idea. But if you don’t have business credit, you may need to explore such an idea. Using your personal credit for business expenses means more inquiries into your personal credit and a higher utilization percentage. Both of these can lower your personal credit scores. If your business fails, and nearly a quarter fail in the first year alone, then you still have business expenses on your personal credit cards. You could be out of business for years and still be paying off your business debts. For more information, visit: national.biz/2019-small-business-failure-rate-startup-statistics-industry
Without Business Credit You Can Try Bootstrapping
If you have the funds, then you can finance the start of your business, and if you have enough money, you can technically keep donating to the cause until your business becomes profitable. That wait could be for two to three years on average until a business turns profitable. Consider brand-new industries, which need to convince their prospectus that they are providing a necessary good or service. That may take a very long time. If you have thousands of dollars just lying around, and you can afford to keep them tied up for years, then this could work. For more information, visit: freshbooks.com/hub/startup/how-long-does-it-take-business-to-be-profitable
Without Business Credit, You can Try Venture Capital
When it comes to brand new industries, venture capital firms are on the lookout for the next big thing. After all, it wasn’t long ago that if you said people would pay to stay at another person’s home or to be driven by them in their car, nobody would have believed you. Yet Airbnb, Uber, and Lyft are now all viable business ventures. Venture Capitals often want a large percentage of a business and you end up trading control of your business for business funding. If you do not want to do this, then Venture Capital funding is not for you. Plus, Venture Capitals are really only looking for paradigm-shifting businesses. An over the road trucking company probably won’t get their attention.
Without Business Credit You Can try Angel Investing
Angels are much more informal investors than Venture Capitals. Angels tend to invest less and they often want a smaller percentage of the business in exchange for an investment. But you are still trading some of your control of the business for the money you need. Angels tend to be people you know well or people you don’t know if you are good at networking and can make a compelling case to relative strangers. Depending on angel investing means you are depending on investors having some discretionary income to plow into the business. This means it isn’t going to be an option for many people. It helps if your angels are at least middle class when it comes to income and savings. Angel investing needs some numbers behind it to really work out. But how many people have around $5,000 to just invest in an unproven business? After all, before the pandemic, the Federal Reserve estimated over a third of all Americans can’t cover a $400 emergency expense. For more information, visit: fool.com/the-ascent/banks/articles/does-average-american-save-money
Without Business Credit You Can Try Crowdfunding
Five dollars here and there is exactly how crowdfunding operates. You need to have success with crowdfunding, which is often a winner take all proposition. According to Stratista, the success rate for kickstarter businesses is only about one third. For more information, visit: statista.com/statistics/235405/kickstarter-project-funding-success-rate. Crowdfunding may be helpful, but don’t literally bet your business on it. Much like Venture Capital, straightforward businesses probably won’t do well. For example, a beauty salon is probably not going to do well on Kickstarter unless it’s goal is extremely modest.
Without Business Credit, You Can Try SBA Loans
You could try getting business funding from the Small Business Administration, however SBA Loans are hard to get. Plus, you need to have exhausted other means of raising funds first. For more information, visit: sba.gov/partners/lenders/7a-loan-program/terms-conditions-eligibility
Beyond the PPP, the SBA has other loan programs. But they have their own eligibility requirements and good business credit can help you get them. The Community Advantage program is good for small businesses in underserved markets. There is also Express Bridge, but your business has to be located within a declared disaster area. For more information, visit: sba.gov/partners/lenders/7a-loan-program/pilot-loan-programs
Without Business Credit, You Can Try Grants
Grants usually do not have to be paid back, and the size of grants varies widely. You can check the USDA for rural grants, and grants.gov for more urban projects. Grants tend to have rather narrow applications. There tend to be grants for education and medical projects and certain types of developmental projects, but grants tend to not be for simply running a business. The US government won’t give out grant money for starting businesses as these are grants, not loans. Grants are also extremely competitive. Your business may obtain more government grants if you are a member of a minority or a veteran. You can also try state, city, and county governments. You may have more luck with helping to develop and gentrify local areas. Community and urban development tend to be popular angles for state and local grants. States and cities might provide grants to start businesses. It never hurts to check and ask.
Without Business Credit, How Does Any Business Know If Your Company Is Reliable?
A business credit report is used by more than just lenders and credit card companies. It can also be used by insurance companies and other organizations evaluating a business deal. Your business can also use business credit reports, after all, you may need to check if a potential client will pay you. That’s very useful information to have, particularly before you spend time and money trying to court a prospect.
Business Credit Can Fix These Problems
You need significant money to start a business. There are problems with all of these alternative financing methods. They all cost you more than having business credit does and applying for all of them will take you longer, and it could end up being the only thing that you, as a business owner, do with your time. With business credit, your personal credit scores are protected, you don’t have to gamble your house on your business, any type of business can qualify, and new businesses can better compete with older, established businesses. With business credit, you work with information that is current, accurate, and unbiased as the business CRAs can make it, which should make you more confident in your decisions on which companies to do business with. You also don’t have to try for hard-to-get grants or make a go at crowdfunding, both of which don’t have such great success rates. Business credit is a great way to fund a new or pre existing business. It is the best way to raise money without collateral, good personal credit, cash, or a credit partner. Building business credit is an important step for any business to take.
Recap
With no business credit, doing business will be considerably more expensive than it needs to be. It can trash your personal credit and it unnecessarily jeopardizes your personal assets. Keep your savings and protect your home with business credit.
