“Why won’t someone give me a chance?” That’s what one SBTV.com viewer recently asked. Having started a small boutique one year ago, this entrepreneur used personal cash to pay for purchases. Now she says she wants a business loan for the company, but she doesn’t want to use her personal credit.
My answer: In an ideal world, small business owners would have access to the money they need to start a business based on the quality of their business idea alone. However, as nice as it would be, we don’t live in an ideal world. Even companies with several years of established credit have difficulty getting financing based solely on the credit-worthiness of their businesses. Being undercapitalized is one of the key reasons so many businesses fail.
Your personal financial history is used as a measurement of your character. In the case of this entrepreneur, she’d only been in business one year so the business simply hadn’t had time to become a stand-alone entity. In other words, she is the business. Therefore, if her personal credit record is bad, a lender isn’t going to trust she’ll repay the loan even if they think she’s a wonderful person with an interesting business idea. Additionally, traditional lending institutions require personal guarantees as security for a business loan. The reason — if you aren’t willing to put your assets at risk, then why should they?
In this situation, the best bet is to reach out to family and friends. See if anyone in your circle is willing to invest in your business or loan you the money you need. In fact, you might find someone who wants to invest in the business as a partner which means you’ll get an added bonus of having someone to help you grow your boutique. Should you find someone to help you, make sure you make the transaction formal so everyone understands the business might lose the money and you aren’t to be held personally responsible. Furthermore, if an investor becomes a partner, it’s imperative you have a written partnership agreement in place.
Okay, so you don’t find anyone to invest or loan you the money. Another possibility is to search for micro-loan resources in your area or online. Many cities have economic development councils which have micro-loan programs to stimulate business development. Typically, the loans are for $25,000 to $50,000. In addition to the loan program, these lenders often have an incubator program where you can house your business until you get on your feet. In most cases you’ll receive business counseling too.
Finally, there are a number of micro-lenders online such as Accion USA. Accion is a private non-profit organization offering small business loans and financial literacy education to small business owners in the United States. The organization provides loans even when a business doesn’t meet the stringent criteria a traditional bank must follow. And when you demonstrate your creditworthiness by repaying the loan on a timely basis, you create a history of good credit for your business which helps establish a basis for future loans from traditional finance sources.
So, the next time you ask why someone won’t give you a chance, be creative and make your own opportunity. Many successful businesses have started on a shoestring and with a lot of determination.