While unemployment numbers are relatively low, most Americans feel that the economy is in bad shape, partially because many are underemployed either due to low wages or not getting enough hours, and partially because inflation has driven the costs of everything up significantly in recent years.
As a result, affordability has become a real problem for a large percentage of Americans. This has led to many starting a side hustle or even full blown businesses to make ends meet.
While I always applaud entrepreneurship, I also always advise going into it with your eyes wide open. Unfortunately, most don’t. And it’s usually not intentional—the reality is that most new entrepreneurs simply don’t know what they don’t know.
That often leads to problems down the road. Often, sooner than they might expect.
The most common blind spot I see is related to funding. New entrepreneurs typically underestimate expenses because they’ve never run a business before. They don’t know about all the hidden costs that come with entrepreneurship. All the government fees, software subscriptions, and professional memberships, to name just a few, as well as all the things we expect, like payroll, marketing, and production costs. It all adds up quickly and can derail unprepared entrepreneurs long before they gain a foothold.
This is where business funding comes in.
I’m a big fan of bootstrapping a new business because it reduces risk, but there are definitely a lot of scenarios where funding can help a new business get off to a strong start and even scale quickly, that often can’t be achieved without access to sufficient capital.
W-2 employees tend to find themselves in a stronger position than entrepreneurs when it comes to business funding because they’ve had a stable income, which makes them more likely to have a strong personal credit profile, which is critical to securing access to business credit.
That’s why I believe it’s essential to secure business credit either while you still have a W-2 income or as soon as possible after going out on your own, because once your personal credit profile starts to decline, which may happen once you plunge into the uncertain world of entrepreneurship.
The key is to understand your options when it comes to your funding strategy.
How will you use your funding
Before you even think about seeking funding, you need to know exactly how you plan to use it. This is critical because there is a right and wrong way to leverage any funding you secure.
I always advise that you not use funding for any overly speculative opportunities. For example, if you’ve invented a completely new product that’s essentially unproven in the market, in my opinion, that’s a risky use of funds because it could take a long time to gain traction or flop entirely. On the other hand, if you have a marketing channel that has consistently produced great results, using your funding to scale that channel is usually far less risky.
You also need to run the numbers based on real world data. In an existing business, you already know how your revenue is currently tracking, but in a new business, you should make very conservative projections. From there, you need to ensure you’ll be able to reasonably pay your debt back down quickly from your projected revenue. Even if it takes far longer to gain traction than you initially hoped for.
It’s also smart to do as much work up front as you’re able to. You want to get your company as close to generating consistent revenue as possible before you seek funding so that you can hit the ground running and pay that debt down before it becomes a problem. Far too many entrepreneurs get too comfortable carrying debt long term, which erodes revenue and increases your risk.
Understand how business credit works
Let’s get the uncomfortable part out of the way—despite what the self-proclaimed “gurus” on social media like to claim, you absolutely will have to sign a personal guarantee in order to secure business funding. This means that even if your business fails, you will be personally liable for repaying the debt.
That being said, your business doesn’t need to currently have revenue because approval is based on your personal guarantee.
This is where you need to understand the difference between personal and business credit.
When you apply for business credit, lenders will pull your personal credit profile to confirm you’ll be able to repay the debt even if your business fails. That credit pull will show up on your personal credit profile (and will fall back off after two years) but most business credit accounts will not show up on your personal profile with one exception. If your account becomes delinquent, that will appear on your personal credit profile, but otherwise, it will never show up.
Over time, as your business credit profile becomes stronger, you will be able to secure more funding based solely on that, but keep in mind—you will almost always still be required to sign a personal guarantee for all business credit.
Next, you need to understand your business credit options.
Most people think of traditional business loans, and while there are some cases where that may be a viable option, I don’t believe it’s the ideal option in most cases. Instead, I prefer to use business credit card stacking with 0% introductory rate cards.
Business loans tend to require an absurd amount of documentation and charge exorbitant interest rates, making it more difficult to obtain and more costly to use. Additionally, you’re on the hook for payments as soon as you secure the funding.
Business credit cards, on the other hand, are shockingly simple to obtain, and with their introductory 0% interest rates, are virtually free to use assuming that you pay your debt back within that period. At which point, you can secure new business credit cards and start over with a 0% interest rate.
And you can use your business credit cards for essentially anything you can use a loan for. The only exceptions are that you can’t purchase cryptocurrency or anything related to cannabis, and a few other exceptions on a case by case basis depending on the specific lender.
Smart entrepreneurs secure funding before they need it
Whether you’re starting a side hustle or launching a full blown business, you should take the steps to secure funding before you need it so you can strike while the iron is hot. Business funding helps you get a business off the ground faster, scale more effectively, and carry you through the lean times.
Used properly, it can be a game changer.