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Small business owners and solo entrepreneurs enjoy a unique financial position. Indeed, a company is, by definition, a separate financial entity.
What this implies is that at the end of each tax year, the business owners need to fill not one but two tax returns, one for themselves and one of the company.
But when you run a small business, you’re more likely to use your personal financial situation to secure the company’s survival and growth.
Why do small entrepreneurs often find themselves forced to self-finance? The reason is straightforward.
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Introduction: Small business tips
Large companies tend to have a complex accounting process, combining investments, bookkeeping, projections, etc. But when it comes to small businesses, the accounting process is a lot lighter; rarely introducing more financial depth that cash flows and bookkeeping.
After all, most one-person companies run on a tight budget, making it more difficult to produce an attractive gain plan at a company level.
Consequently, for small business owners, applying for a commercial loan becomes an impossible task. Therefore many have to find alternatives, such as investing their own money to push the business forward.
However, if you’re a property owner or considering the acquisition of property in a commercial or personal context, you might be able to use it to unlock financial advantages for your business.
Solo entrepreneurs: Poor credit makes it more difficult to get a loan
Solo entrepreneurs are in a difficult financial position. Indeed, if they can’t secure external funds for their company, it’s extremely likely that they’ll need to revert to their personal savings.
It’s not uncommon for new businesses to run some expenses through the individual credit card of the owner – in the absence of tangible commercial funds to use. In the long run, this bad habit is likely to lead to a bad credit score, aggravating the risks of debts for the individual.
When you apply for a commercial loan, lenders will only check the commercial credit score for your company – meaning that ultimately, your self-financing strategy doesn’t impact on the credit history of your business.
But, in the process of checking the financial stability of the company, lenders will also notice that the business relies on personal funds instead of generating its income, which can lead to your application being rejected.
Additionally, as personal debts occur, your chances to develop the entrepreneur wealth and get on the property ladder are compromised.
What does it mean for your business?
To put it clearly, when you can’t get a commercial loan, you need a personal loan to sustain your enterprise, but self-financing the same business affects your financial stability. If you don’t own a property, you can’t secure a loan by using your home as collateral.
However, you can get a loan even with a bad credit score
As surprising as it might sound, for a lot of small business owners, the way to financial stability begins with a property. Indeed, when you have a bad credit history, you can find it increasingly difficult to get a mortgage and get on the property ladder.
However, securing a mortgage can be the key to a secured loan option that can be re-purposed for your company. Admittedly, you need to have a solid business plan so that the funds you put into the company can rapidly generate the income you need to tackle your debts.
Your hunt for a loan starts with understanding how bad credit mortgages work and whether you can afford one of those. Ultimately, you’ll need to make a higher deposit and put up with a high interest rate. But it can be the way towards financial stability in the long term.
Your home can release money when you need it
If you’re already a homeowner, you can use a home equity loan to ultimately let your home pay for the business. In theory, equity loans let you borrow against your property’s value but only over the amount of the mortgage(s) that are already against the house.
You have two different options depending on your financial situation.
Firstly, you can choose to take a lump sum of cash and repay the loan over time. But you can also use the HELOC to release the maximum amount of money available and borrow what you need from that – which lets you borrow multiple times assuming the amount you need is within the authorized balance.
Securing a loan without putting your property at risk
Home equity and secured loans put your property at risk. If you can’t pay, you could lose it. Consequently, you might prefer safe options; these unsecured loans can help to finance your business growth without using an asset as collateral.
One of the major advantages of this solution is that you don’t need to worry about your credit score because credit rating is not a part of your application, making it easier for new business owners to get accepted.
Use the absence of commercial premises to save money
There is more than one type of properties. While on the one hand, business owners worry about personal properties, they also can’t afford to forget about how their commercial property affect the credit score of their company.
Physical premises are a crucial investment for businesses, and one that can help to build financial stability. Indeed, buying a commercial building provides long-term stability but can affect your cash flow.
Besides, when you’re struggling to finance your business, office or shop ownership is not a priority. Leasing, on the other hand, can free up sufficient cash to maintain your business afloat, even though it lacks long-term stability.
What if you don’t use your commercial property?
If you already own premises, you can consider letting these to new businesses. Indeed, with more and more companies embracing virtual office setups, you can re-purpose your commercial property to finance your business.
As a commercial landlord, you will be securing monthly payments, against maintenance and usage of the property. This process can help you to build up positive cash flows in your business, using the return on property investment as a regular income.
The link between real estate and finance management is complex for business owners. From building up stability for yourself to creating a source of revenues for your business, you can use properties as an asset. But you can also ensure that your property doesn’t get corrupted by your business finances through tactical loan management.