Business funding is equal parts science and art, and like most topics that fall under both categories, it’s also incredibly misunderstood.
There are a lot of laws and standard practices that are clearly black and white, but there are also a lot of aspects of the process open to interpretation and in many cases, there’s room for negotiation.
That makes things complicated and confusing, and it’s compounded by the fact that people on social media freely dole out advice that is often misguided, flat out wrong, and in some cases, even illegal.
Because of this, many entrepreneurs who try to get funding for their business often give up before they reach the finish line. There are several reasons for this, including not knowing where to start, taking the wrong approach, or choosing the wrong credit products.
This is easy to do considering all of the myths about business credit that many otherwise intelligent people believe. And unfortunately, these myths are repeated frequently because they make for engaging content, and can even be used as fodder to pitch some nonsense “silver bullet” as an easy solution.
That’s unfortunate because a lack of funding is the leading cause for businesses not growing, and more shockingly, going out of business entirely.
So I’m going to address three of the most common business credit myths, and explain how that aspect of the industry really works.
My business is too small to get funding
Many of the people I talk to are convinced that only giant companies, like Microsoft, General Motors, and Walmart can get access to business credit. That’s simply not true.
While these corporations do have access to a significantly larger amount of credit at far more favorable terms, that doesn’t mean your business can’t get funding. The truth is that the size of your company has absolutely no bearing on your ability to get credit. Lenders don’t care how big your business is—what they are looking at is whether you can repay your debt to them. It’s that simple.
Now obviously, the bigger your company is, well, to be more specific, the more cashflow your business generates, the more you’ll be able to borrow. But even if you need to start with a smaller amount of capital, you can always request more as your revenue increases and you build a stronger business credit profile.
My business is too new to get funding
I’ve worked with brand new companies that had literally just filed their incorporation documents and still received funding.
Again, this is because it’s not about how long you’ve been in business, but rather, how likely you’ll be able to repay the debt. Lenders are in the business of making money, and they can only do that when they lend their capital out.
You’ll run into the same situation as the previous myth—a new business won’t yet have a strong credit profile, so you’ll be on a shorter leash at first, but as your revenue increases and you demonstrate your ability to manage your debt responsibly, you’ll be given access to more capital. (*Note: You may have to ask for an increase, but often, lenders will offer it unprompted if they see that you’re financially responsible.)
I don’t need a personal guarantee
This is probably the myth I hear most frequently, and I think it’s so prevalent because so many people want it to be true. Unfortunately, the truth is that despite the funding being for your business and being in your business’s name, you’ll still need to sign a personal guarantee.
This is required by lenders to protect their capital. If it wasn’t, there would be literally nothing stopping people from starting companies just to get funding, and then shutting the companies down after extracting the borrowed funds.
Obviously not everyone would do this, but if even a tiny percentage did, it would force lenders to raise rates on all borrowers to makes up for the losses, and would eventually force them out of business.
So yes, you will have to sign a personal guarantee for business credit, and that’s not a bad thing. In fact, I actually see it as a good thing because it forces borrowers to be more cautious, plan more thoroughly, and work harder to ensure their own success.
It’s worth noting that if a company reaches a certain size or becomes publicly traded, the situation changes, but that takes a compelling business model, an almost Herculean effort, and a healthy dose of good luck to reach that level. For perspective, this level is made up of less than 1% of all companies in America.
But as a small business owner, you will have to sign a personal guarantee.
Closing thoughts on the state of misinformation in the business credit industry…
While there are a lot of credit myths, even beyond what I’ve covered here in this article, don’t get discouraged. When you get past the misconceptions, you’ll open an entirely new range of opportunities to run and scale your business, helping you to achieve more and create greater impact.
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Ari Page is the CEO of Fund&Grow, which helps entrepreneurs get the business credit they need to run and scale their companies. He is recognized as one of the leading experts in the industry, and is regularly asked to speak on the topic on stage and in the media.