Business owners tend to rely on borrowing money to grow their businesses. However, it is not without pain that many small business owners and entrepreneurs experience when borrowing money. In this article, we explore a bunch of damaging outcomes that occur when small business owners borrow money for their businesses. By sharing what we see every day from small business owners we hope to share some foresight for small business owners who wish to access financing for their businesses.
Small Businesses Need Financing
The typical small business regularly seeks and utilizes working capital of some type to address various needs including growth. A recent dataset from Anna Serio suggested that in 2021, 57% of small businesses sought financing in amounts less than $100,000. In another recent article published by Fundera, nearly 3 in 10 small businesses fail because they do not have access the capital they need.
So, small businesses need working capital to fulfil their short and long term needs and they seek funds in all sorts of avenues, from SBA loans to Merchant Cash Advances. In 2021, we surveyed over 1,000 small business owners about their experiences with seeking funds for their small businesses.
Our data showed several commonalities which were interesting:
- 68.8% of small business owners said that they sought working capital without restrictions
- 43.1% of the small business owners said that speed in receiving funds mattered over most other factors, including rate
- 92.5% of small business owners we surveyed said they wanted an SBA loan but only 1.3% said they had received an SBA loan.
- The most popular loan product sought in 2021 was a Line of Credit
What are the unintended consequences of borrowing money to finance your small business?
Clearly, small business owners look for financing for their small businesses. The data supports our work with small business owners as they seek financing that is fast and easy. However, many times small business owners face the unintended consequences of borrowing money. From our data and experiences, we have put together a list of some different consequences that we see small business owners encounter when borrowing money.
Using Personal Credit to Finance a Business
This is one of the biggest areas we encounter small business owners taking a hit. Small business owners take personal loans and use personal credit to finance their businesses. When small business owners finance their businesses using personal credit or personal loans they generate lower credit scores, reduce the amount of credit they can use for their personal lives and jeopardize losing everything.
Risking Personal Assets
This occurs when small business owners pledge their personal assets to back what they are doing for their businesses. For instance, some small business owners personally guarantee loans they take or even worst, they collateralize their homes and savings. When businesses cannot pay their bills, the lenders will come looking for you to satisfy your commitment.
Co-Mingling Company Credit with Joint Credit
Small business owners who have joint credit with other family members (such as spouse or children) run the risk of having people who are not associated with the business hurt the company’s credit or business owner’s personal credit.
Not Paying Your Bills on Time
Not making payments on loans or credit cards on time each time they are due can hurt your ability to borrow money for your business or attain vendor accounts.
Using Your Family’s Money
Routinely, we see small business owners using their family’s savings or personal credit for their business. Once this becomes a regular practice, business owners cannot carry enough cushion to get them through hard times if they come up. The idea is that eating up your personal credit for business expenses weakens your safety net.
Failing to Build Corporate Credit Correctly
From time to time we find small business owners either confused or misinformed about how to develop corporate credit. Incorporating your business allows your business to be separate from your personal wealth. If one understands that there is a process for building appropriate corporate credit and follows that process correctly, it is easy to separate personal and business wealth. However, often we see someone trying to build their corporate credit by getting a Uline account or a Grainger account and failing to harness how to build progressive corporate credit.
Trying to Accelerate Corporate Credit Too Quickly
Having adequate business credit takes time and many business owners try to build their credit too quickly. It takes time to build corporate credit to levels where small business owners can access financing without a personal guarantee or strictly on their business credit. Some business owners turn to just applying for corporate cards and getting declined, or those cards go on their personal credit.
Poor Follow Up on Building Corporate Credit
It takes effort to consistently build your corporate credit. In many cases, small business owners fail to keep track of their progress and waste their business credit. They tend to miss key benchmarks or elements that can increase their credit.
Overextending Borrowing Capacity
There are many times we see small business owners take on debt and do not truly understand what that means to their profit margins, etc. For instance, we see small business owners regularly take Merchant Cash Advances. Those advances can carry 50-55% interest so if you do not have profit margins that would yield enough to make these MCAs work, then it is probably not a good idea. We see small business owners utilizing these risky practices regularly.
Small business owners want access to business financing but at what cost? In this article we provided real things that happen when small business owners take on financing. In many cases, small business owners never see what is coming until it is too late.
The best financing programs for small businesses at those that utilize corporate credit, which carry low interest and that do not carry a personal guarantee. To build adequate corporate credit, small business owners need to build their portfolio of tradelines which have a record of successful payments and depth.
To learn more about our programs that help build corporate credit, please click here.
Dr. Thomas Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.