Personal Debt Funding A Business: High Risk

More entrepreneurs than ever before have personal debt funding a business. This puts them at high risk because if their business fails they are on the hook to repay their creditors. Or they could overload their personal credit usage which will hurt their credit score. In turn, this could prevent other purchases reliant on credit scores, like mortgages or car financing. So what should you do instead of using your personal debt? I’ll explain in this article.

Personal Debt Funding A Business: The Stats

Let’s review the stats of small business owners using their personal credit cards or personal loans to start or maintain their businesses:

According to business.org entrepreneurs respond that they are maxing out personal credit cards to run their business. Others say they use personal debt because of the pandemic. And there’s a sizable portion of owners who don’t save for retirement to keep their businesses running.

These statistics paint a sobering picture: The vast majority of small business owners today turn to their personal credit because they have little other options.

Why Type Of Personal Debt Do Business Owners Use

When it comes to personal debt funding a business entrepreneurs use all types:

  • Personal savings
  • Credit cards
  • Personal loans
  • Family members and/or friends
  • Home equity loan
  • Investments (stocks, crypto, etc.)

Reviewing the responses I see that many small business owners don’t think about getting a business credit card or can’t. Which leads me to the next point.

Getting Business Credit Can Be Tough

The main reason that many entrepreneurs use their personal credit to run their businesses because getting business credit can be tough.

There’s plenty of banks and financial institutions offering business credit cards or loans but their requirements are quite strict. If you have a brand-new business it’s quite difficult to get a loan. However, you can usually get a small business credit card. I was able to get one of those because I have a good relationship with a credit card company after using my personal card for years. Yet, if you’re personal credit has some black marks then you may not be able to get a business credit card. Or you could get one with a low limit and a high interest rate.

I suggest working on raising your personal credit score if it is low. This will take time, however. Ideally, you want to do this before you open your business.

If you’re currently running your business and you need credit to keep it running then try Fin-Tech banks. I find these banks tend to access less-than-stellar credit applicants and new businesses than traditional banks.

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