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Taking on new credit for your business is a big decision that can come with a lot of feelings, like fear, anxiety, and avoidance. It is one of many other factors that can stop business owners from building business credit. In fact, according to a 2024 FED Small Business Credit Survey, in 2023 over 18% of business owners surveyed didn’t apply for financing because of debt aversion and another 7% because they were discouraged by their chances of approval. However, using business credit strategically can be a tool to propel your operation forward and help build more financial confidence in yourself. Two experts share best practices and bite-sized exercises to help you feel more confident in using credit strategically as well as other money moves to transform your business.
Editor’s note: The following columns were first featured in the Square Banking newsletter. Aja Evans and Keila Hill-Trawick are not employees or consultants of Square and the views expressed in this article are solely those of the authors and are not endorsed by Square.
Good With Numbers: The Pro’s Guide to Making Smart Credit Choices
Keila Hill-Trawick is founder and CEO of Little Fish Accounting, a boutique CPA firm dedicated to serving micro businesses through accounting and tax support.
Dear Keila,
A lot of small business owners I talk to are terrified to open that credit card or rack up debt on a loan. They’re worried because they’re like, “What if we don’t succeed?’”But in order to be a small business owner, you need to take that leap and you need to have faith in yourself and your ability to be successful.
— Caroline, toy shop owner, Los Angeles, California
You’re absolutely right! It’s natural to be apprehensive about taking on debt but with careful planning, you can approach credit options with confidence and clarity. Here are a few best practices to help:
- Assess your cash on hand. Before taking on any loan or line of credit, you’ll want to evaluate your cash reserves. We typically recommend that our clients start looking at loan options when they have less than three months of operating expenses available. This provides a buffer while they explore financial avenues.
- Understand the types of credit. Most loans provide a lump sum of money you repay in fixed installments, whereas a line of credit allows you to borrow, repay, and re-borrow up to a set limit as needed. You don’t have to use the funds from a line of credit all at once, so it offers more flexibility and security than a traditional loan. A loan might be a good fit for larger purchases, like property or large equipment, while a line of credit is better for ongoing operating costs.
- Plan for repayment. Debt can be a valuable tool if used responsibly. Before committing, ensure you have a solid repayment plan. Determine how much you can afford to pay back monthly and annually, similar to planning for a car loan.
- Leverage the expertise of a banker. If you have a business bank account, you most likely have access to a banker who can provide personalized guidance, help you navigate your options, and choose the one that best suits your needs. If you don’t have a trusted banker, try visiting your local bank to see if someone can help you out. Generally there is someone who is aware of small business needs and can point you in the right direction if no one has been assigned to you.
- Evaluate your business pipeline. Consider the business you anticipate coming in and how it aligns with your repayment plan. You want to make sure that your future income is sufficient to cover the debt. And remember the longer the repayment period, the higher the risk of unforeseen circumstances impacting your ability to repay.
Remember, taking that leap of faith is a significant part of being a small business owner. With careful planning and a clear understanding of your financial situation, you can approach new credit options with confidence and make the most of the opportunities they provide.
Finance in Focus: Getting to the Root of Your Money Beliefs
Aja Evans is a licensed mental health counselor who specializes in financial therapy. She owns and operates a private practice in New York City.
Dear Aja,
My immigrant parents were very conservative when it came to money. It was all about saving, and I agree with them. It doesn’t matter how much you make — being careful, being smart with your money is what matters in the long run. How you manage it is make-it-or-break-it’for a small business owner. My parents were open about the money side of [their] business — I learned a lot from them and being conservative in my own way.
— Jimmy, burger shop owner, Los Angeles, California
Often, our parents provide the model for how we think, feel, and behave with money. Our money beliefs are solidified by ten years old, and those early conversations about money impact how we learn to look at money as adults. Jimmy, it sounds like money conversations were common in your family. That is wonderful, and sometimes rare to have such open conversations. That educational foundation for managing your money and prioritizing financial stability can be life-saving.
The history of people of color and banking institutions is fraught with oppression and mistrust. Only a generation or two ago, depending on your age, women and people of color were not allowed to get bank accounts or have access to credit. It felt safer to save money and keep it close to home, like stuffing it into a mattress. As time passed, the relationships between banks and people of color have been able to heal and adjust, but it can still come with some hesitation. Understanding where your values, beliefs, and priorities lay for you and your business will only guide you to success.
While saving is a smart financial habit, getting comfortable with using other money tools like credit can be transformative. Try these exercises to begin boosting your confidence with credit so you can get the most out of it for your business.
- Start small. Use credit to pay for one small thing for your business, and pay it off before it accrues interest. See how it made you feel to use credit as a tool.
- Practice trust. Reflect on times in the past when you’ve done the right thing for your business, as well as when you felt like you should have done something different. What patterns or commonalities do you see? Trust that you can do the right thing over and over, even when you’re scared.
While it’s natural to feel apprehensive about opening new business credit, these tricks will help you approach your options with more clarity and confidence going forward.
