Using Credit to Access Capital for Your Small Business

Using Credit to Access Capital for Your Small Business
Topics Small Business Lending

When entrepreneurs reach a point in their businesses where they need additional cash flow, they often look to credit.

While credit is a good resource for a new small business venture, it’s important to use it wisely, much like personal credit. In fact, an owner’s personal credit history can affect their ability to get credit for their business too. This is especially true for startups and sole proprietorships. In the early stages of building your business, your personal budget and credit can be a factor in your business’ finances.

As you plan your small business’ future, keeping personal and business credit portfolios in good standing can have lasting impacts on eventual access to funding for larger capital needs.

Here are ways you can plan for a solid credit profile for your personal and business finances.

Create a Personal Budget

Creating a personal budget can help you navigate everyday personal finances, building savings and cash reserves for personal and business expenses.

Establishing a personal budget will also help you have a firm grasp on whether you can afford to use credit—if you don’t have the monthly income available to pay a credit card bill in full or make a personal loan payment, it’s not the right time yet to open a credit account. Your budget will help guide you when making these important credit decisions that can impact your personal and business finances.

Build Up Your Credit Score

Building your personal credit score will go a long way in accessing future credit for your business. Credit cards and personal installment loans are two good ways to start building credit—just make sure you pay your credit cards and other loan payments off each month.

Also be aware of identity theft and credit mistakes on your accounts. You can keep tabs on your credit by obtaining a free credit report at You are entitled to one free credit report every 12 months from the three major credit bureaus, and if you notice anything that is incorrect or suspected fraud, notify the bureau(s) immediately.

Keep Your Financial Records

When the time comes to apply for business loans, you’ll need detailed records of your business’ financials. But you need to keep your personal financial records too, especially during the early years when your business is in its startup phase or if it is a sole proprietor.

As your business grows and establishes its own credit portfolio and financial history, these documents will be useful for income and business tax filing as well.

Establish a Banking Relationship…But Do Your Research

Consumers and businesses alike have many banking options available to them, both local and online, but not all banks are the same.

Find a bank that has the personal and small business banking products you need or will need as your business grows, such as preferred lender status with the U.S. Small Business Administration (SBA).

Get to know your bankers, they can help guide you as you consider financial decisions for yourself and your business, and if they are SBA-preferred lenders, can help you access funding specially-tailored for small businesses when the time is right.

Incorporate Your Business

It’s important to review your business structure for not only tax purposes, but to protect your business from any personal liabilities that may arise. Even if you are as careful with your personal finances as possible, you want to protect your business from unexpected bills and debts, such as those that arise from a medical emergency.

The IRS website lists different types of business structures, including a sole proprietorship, partnership, corporation, S corporation and Limited Liability Company (LLC).

A single-member LLC is the most popular structure for emerging small businesses that want more legal protections and separation from personal credit and assets. Your local Small Business Development Center or tax advisor are great resources for advice.

Taking these steps now will help your small business be well positioned for future access to credit and capital, helping open up cash flow and pursue opportunities to grow your business and build your personal wealth.

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