As much as we talk about the divorce rate in our country, the odds of your new business failing are actually higher than those for your marriage. Half of new businesses fail within the first five years and 65% are done by year 10 (your marriage only has a 41% chance to end in divorce).
If either ends, chances are it will be because of the same reason: finances, the No. 1 cause of both business failures and divorce.
No matter what industry you’re in, cash flow is the proverbial lifeblood of your business. Reliable financing keeps the wheels turning while your business edges towards profitability.
Most business owners will need some sort of credit
Some folks will have the personal income (or friends/family/investors) to bankroll a new business during the ugly duckling years. Others will need financing from the start.
If you need to finance your startup with a lump sum, such as renting retail or kitchen space, then you’re looking at small business loans. For things like inventory, you may end up with a credit line with a vendor.
At a minimum, most business owners are going to want a small business credit card. It keeps your regular business expenses separate from your personal expenses, and it’s a reliable, reusable way to cover those expenses for a few weeks during slow revenue periods. And as a literal bonus, the best small business credit cards earn rewards on your business purchases.
How a business focused credit card could transform your small business
A business credit card can significantly accelerate small business growth by providing access to flexible financing and working capital. It allows businesses to manage cash flow efficiently, take advantage of immediate purchasing opportunities, and leverage rewards and cash-back programs to reinvest in the business. Below is one of our current favorite business cards that we feel meet the needs of a wide range of businesses.
Creditors will want your personal guarantee
No matter what type of credit you rely on to start and build your business, the creditors are going to want some assurances you can pay them back. This will often mean either one of two things:
- Collateral: Some small business loans will require collateral, such as equipment loans that are secured by the equipment purchased.
- A personal guarantee: The personal guarantee clause says you take personal financial responsibility for the debt and agree to repay it even if your business fails.
Point one only works if you have assets to back it up. Point two only works when you have a credit history to back it up.
Good personal credit can grease the wheels
When you apply for business credit, you’ll generally also be agreeing to a personal credit check. Creditors will check your personal credit reports to make sure you have a good history of paying back your debts.
If you have poor personal credit — or, sometimes just as damning, no personal credit — then you’re going to have a much harder time getting approved for new business financing.
On the other hand, if you do have good personal credit, you’ll have a much easier time getting approved for business loans, credit cards, and even business rentals. You’ll also be more likely to receive low interest rates and larger loan amounts.
The easiest way to improve your credit score
Although you generally need good personal credit to get approved, most business credit accounts won’t show up on your personal credit reports* after they’re open. So, business credit accounts won’t typically help you build your personal credit.
*Important: The exception is if you default on business credit that has a personal guarantee. In this case, the defaulted account can and will show up on — and cause a lot of damage to — your personal credit reports.
Instead, you’ll want at least one personal credit card that can help you build your personal credit score. If you’re having trouble getting approved, consider a secured credit card (which can be easier to get).
Using a credit card to build credit
Credit cards can be a good way to build credit when they’re paid in full every month. I suggest using the card to autopay a small monthly bill, such as a streaming service. Then, set your bank account to automatically pay the card off in full before its due date every month.
Paying your cards on time and in full every month will build a positive payment history. You should see improvements to your credit scores after about six months of building only positive payment history.