It’s no secret that capitalizing your startup business can greatly contribute to its long term success. However, did you know that even the smallest amounts of financing can take your startup business to the next level in a big way? That’s right, small loans can generate big returns for your startup business.
According to a recent study completed by four college professors for Accion Texas, “How Much Does Credit Matter for Small Business Success in the United States”, small amounts of financing can contribute greatly to the long term survival of your startup business. Entrepreneurs who applied for financing through Accion Texas between 2006 and 2011 were examined for the study. The study found that:
- Approximately 30% of the applicants who received small loans from Accion Texas were still in business in May 2013.
- The majority of the businesses that survived were able to hire more employees which often resulted in higher revenues.
Additionally, it found that receiving a small loan (with the average amount being around $11,000), increases a startup business’ survival rate by 50%. This suggests that the positive impact of extending small loans to startups is enormous and critical to the long term sustainability and growth of the business. The study also found that entrepreneurs who obtained a small loan to start their business (and sustain it) were more likely to qualify for financing again in the future, should they need it.
Good Personal Credit is an Asset that You Need to Qualify
If you decide to take advantage of small loans to fund your startup and you go on to need more financing, it’s important that you understand two key points:
- How to separate your personal credit from you business credit.
- How to manage your personal credit so it remains an asset and not a liability.
Separating your personal credit from your business credit can have tremendous positive effects on your business and protect you (personally) from any debts the business incurs. After you pay back the small loan you received, lenders may be more inclined to lend to you strictly under your business entity since you have already proven to be creditworthy. Maintaining your credibility with lenders is crucial to preserving your personal credit. Defaulting on a small loan will make it significantly more difficult if not impossible to obtain additional [and higher amounts] of funding from lenders in the future. Therefore, if you want to have continuous, easy access to financing you should always remember:
- Don’t take on more debt that you can handle for your small business. Starting with a small loan (between $5,000 and $20,000) is best.
- Any funding you receive to capitalize the business should immediately be used on revenue generating activities (e.g. advertising that generates sales or leads).
- Always make timely payments.
Keep these in mind and act on them. If you do, your business will remain sustainable and profitable. Furthermore, you will never find your business on the verge of closing down due to lack of capital or your inability to qualify for financing from traditional banks and lenders.