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BFS Capital Blog

How to Finance a Business When You Have Personal Debt

January 5, 2015

Almost everyone has debt at some point in their lives. For some people, it overstays its welcome. When you’re tired of working for the man and ready to get you and your family out of the hole, you might look into starting your own business. But, where will you find the money to finance a business when you already have so much debt?

Sources of Financing

While the country is making a slow recovery from the financial failures of 2008, big banks may be hesitant to offer large credit lines, or may require small business owners to pay off credit balances in full every month. Small businesses need access to any and all forms of money available to them. Here are some financing options:

    • Short-Term Cash Loans – These business loans can be taken out by small business owners who have a need for growth and development. As personal debt lingers, these loans are designed for shorter terms and can be used for any business expenses. The advantages of using short-term business loans are that they are easy to start and require very little paperwork. The underwriting and approval process provide quick responses which speed up the distribution of funds.
    • Merchant Cash Advances – Merchant cash advances are a type of receivables financing wherein a lump sum amount, determined by a company’s debit and credit card processes, is given to finance business expenses of any type. There are a few advantages to using this type of financing: because the lender collects money based on a percentage of monthly sales, slower months can lower the amount of payment.
    • Individual Retirement Account (IRA) – It is possible for small business owners to turn retirement savings into working capital by investing part or all of their IRAs into their business. Besides a fee, this method would not incur interest payments or debt. However, it is a very bold move by any business owner to deplete their own security for their future. Should the business lose the invested money, there is no getting it back.
    • Lines of Credit – There are a lot of variables that factor into credit scores, so having personal debt doesn’t necessarily equate to having a low one. With a high personal credit score – generally above 700 – small business owners may be able to secure lines of credit even if their business is losing more money than it is generating.

Obtaining Credit

Unless you are born into money or just really good at investing, you need credit to build a business. Outside financing is never a luxury; it’s a necessity. However, unlike being born into money, you cannot be born into having a good credit score. Many small business owners struggle with credit. It’s a Catch-22: you need history of reliable credit borrowing in order to be granted a loan or line of credit, but you need to be granted a loan or line of credit in order to prove that you are, in fact, a reliable borrower.

Even the smallest lines of borrowing and repayment can help build your credit profile. As a business owner, talk with your vendors and suppliers. Although you are able to pay them up front for their products and services, work out a deal that allows you to pay them over time. Ask if they would report your payments and consistency to the three main credit bureaus – Experian, Equifax and TransUnion. This can help build credit history. Just be sure to never forget your payments and always pay on time.

Opening a business credit card may also prove reliable lending history, so long as payments are made on time and the recommended 30 percent of the credit limit is not reached. Another option to look into would be to think of leasing equipment, rather than purchasing.

As credit history builds, you are more likely to be granted larger loans to help grow your business. Personal debt does not have to deter you from building an empire. Work around it for a while and soon enough your business will take care of it for you.

Call us today and we’ll guide you toward the financial solution that is best for your business.