Small Business Loans and Credit


Part of small business finances revolve around loans and credit. Because most small businesses need loans to start up, and periodically through operation, small business owners need to know the options when it comes to credit and loans. From calculating an accurate balance sheet to exploring line of credit options, you should learn these small business finance basics that revolve around borrowing money. Otherwise, you could end up making poor decisions that could cost you your good business credit or your business’s success.

Creating a Balance Sheet

When assessing your small business’s needs, you need to know how to create a balance sheet. Balance sheets tell you about your business’s health, and clue you in when something’s amiss with your finances. The formula is simple: your owner’s equity plus your liabilities should equal the amount you have in assets.

Your assets are both fixed and current, though the current ones should go first on your balance sheet. Current assets are those you could sell within a year or less, making them liquid. Fixed assets are things like investments that will take longer to gain any actual capital out of but are still worth money to your business. Liabilities include things like bills your business needs to pay, including accounts payable to other clients and credit card bills. You want to create an accurate balance sheet every six months (or every quarter) for a few reasons. The first is that a balance sheet will help you watch your company’s financial health over a period of time. The second is that it’ll help you secure financing. Those assets can help you convince a lender to give you a loan to help build another part of your business. Over time, you can include those loans in your balance sheet to watch how you’ve used them to grow your company.

Understanding Personal and Business Credit

Your personal and business credit should be two separate things. Most small business owners do
their best to separate personal and business finances and expenses. Having two bank accounts, different credit cards, and crafting very detailed expense reports are a few ways people keep these finances separate. Achieving both a personal and a business credit score is a very good practice for business owners.

The reality is that, as a small business owner, your credit is going to get a little bit mixed no matter what you do. Having a business credit card could impact your personal credit score. Many business cards won’t report anything to your personal score unless you default on your payments.

That being said, some business owners use one credit score to boost the other. Having a business credit card that reports to your personal credit score could boost a bad personal score. When starting businesses, some business owners with fabulous personal credit use those high scores to secure personal loans when they can’t get business loans. In general, these aren’t good business practices and, if you mix your finances, you should separate those finances again as soon as you can.

Using Credit Cards

A business credit card can be a helpful way to keep track of expenses, especially those incurred while traveling. That being said, remember that a credit card is an unsecured loan, which means you typically have low spending limits and high interest rates.

For small expenses, like meals, plane tickets, and hotel bookings, business credit cards are great. You can pay down those amounts quickly, so you don’t accumulate a lot of interest. You also get the credit card statement as a way to track finances. If you need money to grow your business, though, a credit card isn’t the way to go.

Getting Lines of Credit

A fixed loan amount isn’t right for every business. If your business grows and changes rapidly, knowing how much money you’ll need six months from now can be quite difficult. Instead of a traditional loan, you might consider a line of credit instead.
With a line of credit, you get approved to borrow a certain amount. However, you do not have to borrow that entire amount. But, if you borrow too little, you can come back and borrow more as long as you don’t hit that borrowing limit. Lines of credit, especially revolving lines of credit, offer considerable flexibility for small businesses. For example, Kabbage offers a revolving line
of credit that allows you to borrow money as you need it up to a certain amount. Once you pay
back some of the principal, you can borrow again. You’ll like knowing that a line of credit typically offers lower interest rates than a credit card. You also face fewer penalties for cash withdrawals or balance transfers.

Finding a Guaranteed Loan

Many people seek out Small Business Administration (SBA) loans when starting or expanding a
small business. The reason they’re so popular is the federal SBA agency guarantees these loans. This means that if you default on them, the agency agrees to pay back some or all of the loan instead. So when you go to the bank asking for a loan, an SBA loan gives the bank extra security. That may mean lower interest rates or an easier time getting a loan for a new business owner.

You have a few options with SBA loans. You can go for the 7(a) loan program, which will loan
out as much as $5 million in a federally guaranteed loan through a financial institution. A microloan is another option; you can get as much as $50,000 through a community nonprofit.
If you’re going to apply for an SBA loan, make sure you’re willing to put down a personal guarantee, too. SBA loans require people with 20 percent ownership or other top managers to
personally guarantee the loan. Whether you’re adept at finances or need to hire an accountant, you should know at least the basics of small business finance. Understand enough to know what kind of loans or lines or credit to pursue, and how to monitor your business’s success and financial health.

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