Why Small Business Owners Should Care About Business Credit

Small business

By Steve Ely, CEO at eCredable

Small Businesses fuel the U.S. economy.  According to the Small Business Administration (SBA), existing small businesses comprise 99% of all employer firms, nearly half of the workforce, and account for more than 60% of the private sector’s net new jobs.  The SBA says that close to 66% of small businesses will survive their first two years.  That means that only about 1/3rd of total businesses will fail during the first two years.  The SBA also says that about 50% of businesses fail during the first year in business.  That’s a lot better than the crazy statistic “people” like to quote of 7 out of 10 new businesses fail.

No matter what numbers you believe, there is a reasonable chance your new business could fail.  A recent study by Babson College of small businesses with more than four employees broke the reasons into four major groups: 1) access to capital, 2) regulatory complexity, 3) access to talent, and 4) technology (with a significant focus on cyber security).  This paper is intended to speak to the number one issue – access to capital.

Funding a small business usually starts with personal capital – savings accounts, retirement accounts, small investments from family and friends.  If the business survives the first year, it might have enough business credibility to seek out additional capital from angel investors or various lenders – banks, online lenders, SBA loans.

Most small business owners will rely on their personal credit when applying for loans or credit lines.  Every lender is going to consider your personal credit as a reasonable proxy for how you manage your business. This is fine in the early days of your business (assuming you have good personal credit).  You can apply for business credit cards and trade credit using your personal credit history – in other words, using your FICO Score which relies on your personal credit history.

But what happens when your business starts to grow and you need more capital for expansion, inventory, equipment, or more employees?  Every time you use your personal credit to apply for business credit you are creating three problems:

  1. You only have so much personal credit capacity.  When you acquire a business credit card with a limit of $50K, you just reduced your personal capacity by the same amount.  That could hurt you when you want to get a student loan to send your kid to college, encounter a major unforeseen expense, or you want to refinance your home loan.
  2. You are putting your personal finances at risk.  Every time you apply for a line of credit using your SSN you are putting your home, your 401K’s, your assets at risk and allowing a creditor to come after these assets if your business fails.  The sooner you stop personally guaranteeing business lines of credit the better off you will be.
  3. Aren’t you building a business to thrive and grow?  Eventually you will need access to significant capital and you’ll need a business credit score in order to secure approval.  The sooner you start building one, the better your score will be when you really need it.

So stop thinking that you don’t need to worry about building a business credit score.  There’s no time like the present to get started on this critical aspect of managing your business financial life.

Steve Ely is CEO at Atlanta-based eCredable, which  helps consumers and small business owners build or enhance their credit profiles & helps lenders access a larger market of scoreable consumers and small business owners.