It’s no secret that capitalizing your startup business can greatly contribute to its long-term success. However, did you know that even the smallest amounts of financing can take your startup business to the next level in a big way? That’s right, small loans can generate big returns for your startup business.
According to a recent study completed by four college professors for Accion Texas, “How Much Does Credit Matter for Small Business Success in the United States,” small amounts of financing can contribute greatly to the long-term survival of your startup business. Entrepreneurs who applied for financing through Accion Texas between 2006 and 2011 were examined for the study. The study found that:
- Approximately 30% of the applicants who received small loans from Accion Texas were still in business in May 2013.
- The majority of the businesses that survived were able to hire more employees, which often resulted in higher revenues.
Additionally, it found that receiving a small loan – with the average amount being around $11,000 – increases a startup business’ survival rate by 50%. Did you catch that? Let me say that again. If you obtain financing as a startup – and only a small amount such as $11,000 – then, according to this multi-year study, you have a 50% better chance of staying in business! Sorry for getting a little excited but don’t let your ADHD fool you if you’re skimming over this – financing can be a wise decision in the early stages of your company!
This obviously suggests that the positive impact of extending small loans to startups is enormous, and critical to the long-term sustainability and growth of the business. The study also found that entrepreneurs who obtained a small loan to start their business (and sustain it) were more likely to qualify for financing again in the future, should they need it.
If you decide to take advantage of small loans to fund your startup and you go on to need more financing, it’s important that you understand two key points:
- How to separate your personal credit from you business credit.
- How to manage your personal credit so it remains an asset and not a liability.
Separating your personal credit from your business credit can have tremendous positive effects on your business and personal credit. As you pay back the small loan you received, lenders may be more inclined to lend to you strictly under your business entity since you have already proven to be creditworthy. Maintaining your credibility with lenders is crucial to preserving your personal and business credit.
Defaulting on a small loan will make it significantly more difficult if not impossible to obtain additional [and higher amounts] of funding from lenders in the future. Therefore, if you want to have continuous, easy access to financing, you should always remember:
- Don’t take on more debt that you can handle for your small business. However, this has different applications for loans than it does for lines of credit. With loans, you want to be cautious and only get what you need and when you need them. However, with lines of credit, it’s always wise to obtain them “before” you need them.
- A good portion of the funding you receive to capitalize the business should immediately be used on revenue generating activities (e.g. marketing that generates leads for you to convert into clients or customers).
- Always make timely payments. Do not, under any circumstances that you can in any way control, be late. This is where liquidity and reserves are helpful.
Keep these in mind and act on them. If you do, you will find yourself in the best possible position to obtain additional financing as you need it. Do not make the mistake that most small-business owners make by over-utilizing personal credit cards and allowing for occasional late payments [which gets justified because you are “so busy”] with your creditors.
Imagine a world where you understand the 3 main reasons why businesses fail; you take action to not let those things bring you down, you always maintain access to sufficient amounts of capital to use as your business plans and needs it, and you vigilantly monitor your business credit history. Now stop imagining and go take action.