First things first: It is important to acknowledge that would-be entrepreneurs often go into business without any savings, depending entirely upon cash loans from friends, banks, or the SBA. Somewhat naively, these business owners expect to be able to start paying down their loans immediately with profits.
What these business owners don’t realize is that it can take months or even years to make a profit. And once a lender discovers a business isn’t as profitable as expected, the lender is likely to call in the loan, or refuse to renew it for another year.
That is precisely why small-business owners need to focus on acquiring credit for their startups, either in the forms of business credit cards, loans, or lines of credit.
Credit cards are a powerful tool for business owners looking to solve short-term cash flow problems. But if you’re relying on personal credit cards to make essential purchases for your business, then you are putting your personal assets at risk, and you are missing an important opportunity to build business credit.
Remember, when you open a credit card account, you are in effect initiating a relationship; canceling your cards will harm your credit score, and failing to pay fees and penalties will quickly turn your card “provider” into a “creditor,” hounding you with bills. So be careful, and bear in mind that your new card can be a burden or blessing.
Peer-to-Peer (P2P) essentially involves marketing your brand to potential investors on the Internet. Websites such as LendingClub.com help connect businesses with individual investors who are looking to lend money at a reasonable rate. P2P lending leverages new technologies that are rapidly evolving to meet the needs of lenders and entrepreneurs.
This means, 1) that it’s a new frontier with flexible rules and standards of practice, and 2) that new resources and opportunities are appearing all the time. So tread carefully, and as always, hire a lawyer to review all your contracts and documents.
Loans and Lines of Credit
If your business is seeking financing to sustain growth, or if you need cash-on-hand to balance a growing number of accounts receivable, then you should target short-term lines of credit or credit cards rather than traditional lump-sum loans.
Generally, small businesses can save a significant amount of money by financing accounts receivable or inventory with short-term liabilities. Revolving short-term credit matures in 12 months or less, so your business needs to plan ahead to make sure you are on track to pay off the liability in full within a reasonable amount of time.
Photo Credit: side.tracked, Flickr.