When it comes to finding the kind of financial flexibility their companies might need to flourish, many owners have likely learned that their personal borrowing history is closely tied to their companies’ ability to obtain financing. This is not the case for other, larger businesses that might operate in the same realm as they do, and that could cause major problems for a smaller firm’s ability to compete.
Some of the most recent research on the subject – conducted by the U.S. Small Business Administration in 2006 – shows that 71 percent of banks use a small business owner’s personal credit history when writing loans for the companies themselves, according to a report from Small Business Trends. This is largely because the ability of such firms to repay financing of less than $100,000 generally is closely tied to that three-digit number. Moreover, because the vast majority of small businesses in the U.S. are run by a single person, most are run as sole proprietorships, which do not separate an owners’ possessions from those of their businesses.
Moreover, many small business owners have often resorted to seeking personal loans when they need financing, particularly when getting a company off the ground, and that can further make it difficult to separate out what money is related to a company, and what goes with an owner’s personal wealth, the report said. Many even use their home equity to fund the ongoing operations of a company.
So what should owners do?
When it comes to being able to find success in applying for small business financing, this usually means that owners will have to do at least some clean-up work when it comes to their personal credit. That might include taking the time to make sure they haven’t missed payments on any personal balances, and are keeping their outstanding credit card debts as minimal as possible to ensure their scores are as high as possible.
But beyond that, they might also need to make sure they’re doing all they can to ensure their companies’ finances are strong. That might include taking the time to find more affordable small business insurance policies, such as those for general liability insurance. By cutting costs in this regard, businesses might be able to save thousands of dollars per year, which can then be devoted to shoring up other aspects of the firms.