Starting your small business may seem like a big investment. You must be prepared to pay for everything from equipment and supplies, to property, legal fees, and employee’s salaries. Thus, when funding your startup, you’ll need to consider your funding options; one of which is a startup business loan.
However, banks are going to need credit for collateral. And, if you have yet to build your business credit you’ll need to consider relying on the personal credit you’ve built. In this case, you’ll want to be sure to keep a few important factors in mind.
Make Sure You Have Good Personal Credit
All business loans run on a system of credit and are always paid off in installments with accumulated interest. To get the funding you need, it will be important that you have great personal credit, and are able to provide your most recent credit history to the lender.
It will be difficult to convince a lender that your business venture is a safe financial investment if you have a bad credit score. So, if there are errors or unaccounted for mistakes in your report your chances of being approved decrease immensely.
Tip: Check your credit report 6 months before applying to be sure everything is in order. If it’s not, be sure to correct it before making your initial appointment with the lender.
When taking out a small business loan on your personal credit, be prepared to include interest in your long-term financial projections. Usually you can pay a fixed monthly rate with a fixed interest rate, which is the easiest option for most. However, if you can’t make these payments, you risk losing your home, and other collateral items you own.
Still, remember that there are also variable rate loans, in which the interest rises or falls depending on if the underlying interest index shifts. The benchmark interest rate (or base index rate) depends on the type of loan as well as the local market economy. The smaller the business loan the higher the interest rate, because they are often paid off quicker than large loans. According to smallbusiness.com, in 2011 loans under $100,000 had an interest rate or 7 to 8 percent.
Tip: Using a personal line of credit often increases the interest rate; take out a little now, and more later when you have established your business credit.
Establishing a Line of Credit
Usually a business owner will establish a line of credit with the lender when the loan balance is the maximum that the bank will offer. As long as you do not exceed the maximum amount in the agreement, you are then able to draw as much funding from the line of credit as you think you will need.
While this option is considered an unsecured loan, meaning you can draw money from it at any time; you are not charged for what you do not use, unlike a small business loan. Lines of credit are common for large business investments.
Tip: Enquire about specific stipulations and regulations. The options for a line of credit can differ from one institution to another, and can actually be more dangerous to your credit and business.
It is important to be fully aware of the extent of your investment before opening up a line of credit or setting up a loan with your personal credit. If your business does not thrive and the investment proves to be unsuccessful, you could be facing a fair amount of personal debt which can lead to a loss of personal items such as your home and car.
However, for many this is the only option, and one that can be used. Be sure that you are able to float your business on the credit you’re taking out before making the final decision.