Personal Credit

Many small businesses obtain a portion of their initial financing from the personal credit of the owners, and franchises are the most numerous small business segment. There are many ways to finance a franchise using personal credit. Financing with personal credit is usually done through the use of credit cards and credit lines to purchase equipment, supplies or even cover personal expenses during the initial stages of the franchise opening.

A word of caution in regard to using personal credit to finance any business: credit cards and even personal credit lines should be used as backup methods, rather than primary sources of funding. High interest rates, among other things, should dissuade franchisees and other small business owners from using personal credit as their main source of funding.

Having adequate personal credit reserves, however, can help ensure success in a new franchise venture. Franchisees should seek to maximize their ability to use personal credit as backup by bumping up their credit limits before they purchase a franchise or leave their current job (provided they are currently employed). Self-employment is considered a risk by many lenders, so it could be harder for consumers to increase personal available credit when they are considered self-employed. It is easier to get increased credit when it is available and not necessary than when it is actually needed. As the saying goes, "banks will only lend you money when you don't need it."

Keep in mind, though, that increasing credit lines will usually involve a credit inquiry by the bank or lender. Although individual credit inquiries have a minimal impact on a personal credit score, they can have a dramatic effect if there are many of them in a short period of time.