It doesn’t matter how thick or fancy your business plan is, or how many letters of intent you have signed, or your wealth of industry experience, if you trying to start a small business and require capital to do so, you are basically limited to what you’re personal financing profile can provide.

Take a look at banks for instance.

Unless they can get you approved through a government backed loan program for equipment, leaseholds, or real estate purchases, they are not going to extend you a business loan.  And even for the government supported programs, if you have below average credit and no personal net worth, you won’t qualify for that either.

Whether we like it or not, start up financing is equity driven, not debt driven.  If you’re looking for debt financing of any kind, it will be based highly on your personal credit,  personal net worth, and sources of personal income.

The reasoning for this is quite simple.  Depending on whose statistics you read, over 40% of start up’s will fail in 5 years.  From a lender’s point of view, if 4 out of 10 loans don’t get paid back, the lender will be out of business themselves.

So to get started, you need your own money or the equity investment of others to fund the business.

The business financing side is a bit bizarre in that if you apply for a business loan and are approved on the strength of your personal credit, earnings,  and  guarantee, you’re still going to be charged a business rate.   If you were able to secure the same amount of borrowing through a personal financing program that relies on the same personal factors and security features, the rate would likely be lower.

In many cases it makes far more sense to secure the personal financing available to you from secured and unsecured loans, and then lend the funds acquired to the business as a shareholder loan.  This will immediately save you money in lower interest costs.

But because entrepreneurs have their mind set on getting a business loan, lenders are more than happy to provide a personal loan in disguise at a higher rate.

Take a look at the trucking industry.  Many leasing companies require owner operators to own a home and have at least an average level of personal credit.  The trucker may think he’s applying for business financing, but the lending or leasing decision is mostly based on personal financial and credit factors.

I’m not saying this is right or wrong, good or bad; it just is.

For anyone starting up a business, the sooner they understand the above, the sooner they will stop beating their head against the wall trying to find something that doesn’t exist.

The key take away is that when you have a new business, you need to focus on leveraging your personal credit attributes to gain the best financing deal possible, regardless of what type of lipstick a lender puts on it.

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