For entrepreneurs, the line between personal and business credit can be a fine one – if there’s one at all. Since most banks balk at lending money to start-ups with no track record, entrepreneurs often turn to credit cards, home equity loans and even friends or family members to raise cash.
By: Phoenix Lee
Whether you decide to get business credit from a bank or find more creative ways to get started, you’ll want to maximize your personal credit. Here’s how:
Charge ahead. When a bank doesn’t come through with business credit, many small business owners pull out the plastic. Research shows that more than 60 per cent of people who have recently started businesses can’t obtain the business credit they need through loans, and 40 per cent of those entrepreneurs have used credit cards to get off the ground.
The advantage of using credit cards to finance your start-up is that they are often easy to get, and the minimum required monthly payments are typically small. Best of all, they put you in control of borrowing; no one will question your plans or second-guess how you’re spending your money.
But that flexibility can be a double-edged sword. If your business plan isn’t sound, huge credit card debts can eventually land you in bankruptcy court. Before you resort to credit cards to get business credit, develop a business plan and approach at least three lenders for a small business loan. If your application is turned down, ask for feedback and use it to adjust your plan. If you’re still convinced you can make your venture work, then pull out the plastic.
If you intend to use your card for business credit, pay as little as possible.
If you do decide to use credit cards, save money by choosing those with the lowest interest rates. Review your statements to determine which ones have the lowest rates and use them first. Before you take a cash advance on one of your cards, check the interest rate and find out if there are any fees. Some banks charge much higher interest rates for cash loans than for purchases, and many charge cash advance fees.
If you use your credit card, personal overdraft facility of personal loans for your business credit, watch the cash flow.
If you only make the minimum monthly payment on your cards and personal loans, you’ll keep your credit record clean. Don’t fall into the trap of letting the bills slide for a couple of months, then making one large payment to “make up for it.” Late payments will be reflected on your credit record for several years – even if you later pay off the account in full.
If you’re facing a cash crunch and aren’t sure you’ll be able to make your minimum payments, call your lenders before you miss a payment and propose to pay a smaller amount for a short period of time until your cash flow improves. For example, offer to pay three-quarters of the usual payment for three months, then resume your regular payments. If the lender agrees, ask for confirmation in writing that your credit report won’t be affected as long as you make the agreed-upon payments.
Pay less, save money. Obviously, the faster you can pay your off your loans, the more money you’ll save in interest. But for many start-ups, just making the minimum payment each month can be a challenge.
Even if you’re “maxed out” on your credit cards and can only afford to make a little more than the minimum payment, how you pay those bills can dramatically affect how much those loans cost. By adding a little extra money to your total monthly payments (just $5 a month can make a big difference), and paying the highest-rate cards first, you can slash the interest charges and wipe out that debt much sooner than if you just make minimum payments on all your loans.
Check your credit report once a year or at least six weeks before you plan to apply for a business loans to make sure it is complete and correct. Millions of credit reports contain incorrect or outdated information that can hold up an application, or even result in a rejection for the credit card or business loan you need.
For new businesses, initial start-up costs can be overwhelming. When your cash flow runs dry, it’s often necessary to finish your shopping on credit. But take note using personal lines of credit for your business costs should be approached with much discerning forethought as it can be very risky.
How to Secure a Personal Loan Quickly
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