With so much economic flux, the number of small business start-ups is rising rapidly although exact statistics are not available because 53 percent are home-based. Owned by sole proprietors, funded with personal credit cards, and known only to their customers and small network of associates, many new companies are not included in statistics.
During the 2007 Direct Marketing Association conference credit reporting agency, Experian, presented a report on small businesses. According to their market analysis, most start-ups are funded using personal credit cards or other personal accounts. And 92 percent of very small companies generate less than $1 million in annual revenues.
If you are one of the millions of people in the process of starting a company or considering a business idea as an option for your future, take heed from the research conducted by Experian. Only 25 percent of new businesses survive after four years. Many small companies fail to separate business credit from personal credit. When small companies ended up with financial challenges, first their business credit started to diminish followed shortly by their personal credit. Over several months, business owners ended up with poor business and personal credit ratings.
If your business fails, its credit rating goes with it. If you form a new company in the future you will be starting with a fresh business credit slate for your new business entity – presuming you have formed a legal structure such as a corporation or LLC. However, your personal credit history will remain with you regardless of what caused an extremely negative reporting period.
It is essential for you to not fund your business with personal credit cards, as tempting as it might be. The rules of business credit differ greatly from rules governing personal credit. When you use personal credit cards for business expenses, you will lower your personal credit scores. You don’t want to risk a personal credit ratings nosedive in the face of increasingly difficult lending requirements brought on by the credit crisis.
While no one can guarantee the success of a business, this series has been designed to help you preserve or build your personal credit while self-funding your business.
- You must plan for the cost of doing business before you seek funding so you have enough cash on hand until your business can pay its own way.
- With excellent credit, various funding options will be available to you.
- When personal credit is a bit tarnished, acquiring funding for a business can be a challenge. However, with a solid concept and determination you can find the funds you need.
- Choose the slow ramp route as your preferred option. Rather than funding your company for a fast market entry, start slow, learn the unique requirements of your new business, and allow it to fund itself by growing slowly.
- Separate your personal credit from your business credit. See my four-part series, You Can Build Awesome Business Credit.
Managing your own company will be rewarding, challenging, creative, and hopefully fun. If being an entrepreneur is in your future, select the start-up path that fits you best. And pursue your dreams.