When it comes to starting your business, not all credit is created equal. A recent study found that companies that borrow under the business name have higher revenues and longer survival rates than those that take out debt in the name of the business owner.
But using personal credit to fund your business is not uncommon — the same study found that 55% of companies reviewed relied on it to finance their startup.
“Before your business has credit of its own, it’s normal to use a personal loan,” says small-business growth expert Evan Horowitz. “I’ve self-funded most of my businesses, putting my own resources and credit on the line — then I hustle to make it happen.”
Business loans may have benefits over personal loans, but there are ways to make personal loans pay off.
Personal loans vs. business loans
According to Rebel Cole, co-author of the study, “Debt Financing, Survival, and Growth of Start-Up Firms,” and a finance professor at Florida Atlantic University, there are two factors that may give business loans an edge over personal loans: increased scrutiny from banks and the option to use personal credit as a future safety net.
Banks tend to monitor the health of businesses they lend to, but they don’t always know a personal loan will be used for business, Cole says.
The study found that companies that start with a business loan have revenues about three times higher and a 19% greater chance of survival than those that start with other types of credit.
While that difference may feel daunting for entrepreneurs whose only option is a personal loan or credit card, all hope is not lost. You can still use a personal loan to fund your business — you just have to be smart about how you use it.
To increase the likelihood of success, prioritize aspects of the business that offer the highest return on investment. Horowitz recommends using the cash you borrow to “grease the path for more cash to come in quickly.”
While priorities will vary depending on your industry, here are three common investments to consider:
Purchase necessary equipment
The proper equipment can get your business running quickly. The key is to look for efficiency. Find machines with more than one purpose, like a combination scanner and printer for your consulting business, or a hot plate plus griddle for your new sandwich shop.
To stretch your dollar further, consider refurbished or reconditioned equipment, but do your homework. Opt for certified-refurbished products that offer a warranty. Horowitz, who used to work for a large electronics manufacturer, says that many refurbished products are items that have been returned because the customer didn’t like them, not because they didn’t work. That translates into an almost brand-new product at a lower price.
Invest in marketing
A strong marketing campaign can help you attract potential customers who may promote your business through word-of-mouth or on social media. To get the most for your money, use market research to find your audience. Study your competitors, what they’re doing right and how you can do it better. Determine how you’ll gauge the success of your campaign, be it through sales or increased engagement on social media.
A digital strategy is cost-efficient, but don’t get distracted by cosmetic details. “Beware of fun beauty projects,” warns Horowitz, like revamping your website, that may distract you from generating leads. Instead, focus on delivering a campaign that gets you and your product in front of people, physically or virtually.
Amp up your inventory
Inventory can be a major expense, especially if you’re in the retail industry. If you take out a personal loan to start your business, use it to make sure you have enough product to attract new customers — and keep them coming back.
A personal loan can also help you take advantage of a great deal offered by your wholesaler, or steady the keel if your business is impacted by seasonal dips. Dropshipping, in which completed purchases are shipped directly from the wholesaler, can keep inventory costs low to help you get the most out of your loan.