The different types of business credit, when to use personal credit cards, how access to credit can support business growth, and an expert’s debt management tips.

At a glance:

• Put some thought into selecting the type of funding, such as a small business loan or a line of credit, to suit your circumstances.

• Access to credit may help your business gain customers and boost revenue.

• The verdict is in: avoid using a personal credit card for business expenses.

• Managing debt effectively starts with getting to grips with your finances – and in the long run that could pay off.

Prospa recently partnered with One Picture* to survey over 500 New Zealand small businesses to understand their priorities and financial needs. They found that 30 per cent of business owners don’t want to be or like being in debt, and almost one in five are worried about managing the debt they’ve accrued. But is being in debt always a bad thing? For small business owners, the debt that comes from taking out a small business loan or a line of credit facility could boost business growth.

The different types of business debt

According to Quentin Glover, owner and founder of Profinance, a lump-sum debt such as a small business loan may be ideal for large, one-off payments on assets that depreciate over time. A furniture maker, for instance, might look to increase the productivity of their small business by purchasing a new machine that automates some of their labour-intensive tasks. In this case, a small business loan suits the single, significant expense that pays itself off over time with productivity increases. This is different to expenses on a regular basis, which is where a line of credit can come in handy. “A line of credit is particularly important for businesses with large seasonal movement,” he says. “Businesses in the primary industries like agriculture, and in hospitality and tourism, will often find a line of credit useful because they usually make a lot of money in a few months before sitting quietly for the rest of the year.” During that lull, a line of credit can provide reassurance that the business can plug gaps in cash flow.

How about personal credit cards?

“Credit cards should be avoided at all costs,” says Quentin. “You hear these stories: ‘We started the business in our garage with three credit cards, [worked hard] for five years and now we’re millionaires’. Some of these stories are true, but for the vast majority, there are better ways.” With the high costs associated with credit cards, Quentin says they prove ineffective for the purposes of boosting cash flow. “They're also getting harder to access,” he says. “I certainly wouldn't recommend anybody use them at all.”

The benefits of access to credit

The key takeaway for small businesses is simple: access to credit enables owners to pursue opportunities they wouldn’t otherwise have. Quentin describes a hypothetical young entrepreneur with a passion for designer sneakers and some big aspirations. “It's going to be hard for them to save $20,000,” he says. “But if they approach a lender like Prospa and get a business loan, they can start importing shoes and selling them online. “All of a sudden, they’re making $100 off each pair and have made it into the trade cycle.” As a result of the initial business loan and their hard work, they’re able to kickstart their business and gain traction in the industry. With passion and enthusiasm, after a few years the loan may be paid off and the business may be making a five- or six-figure profit. “Leverage, by definition, increases outcomes,” says Quentin. “A small amount of movement at one end produces a big outcome at the other.”

Quentin’s tips to manage debt

Of course, the reality is that not every business will be a runaway success. But if used for the right reasons and managed effectively, access to credit can have a big impact on a business’s growth. Here are Quentin’s top three techniques for small businesses to manage debt:

• Get to grips with your finances. When seeking business success, Quentin says you don’t need to be the best business in your industry – what you need to be is a good business person, which includes an awareness of how you are performing financially. “It’s as simple as stopping for 10 minutes every month to pull up a profit and loss statement and look at where you’re at,” he says. “Modern accounting systems let you do that very easily.”

• Approach your business as if it’s family. “A lot of people will probably recognise that owning a business is like caring for a living organism,” he says. “It can have a life of its own. “So how would you treat your own child? You would nurture it, feed it and look after it accordingly.” And that includes taking care to make wise financial decisions.

• Access to credit is like marriage, not a short-term fling. Quentin tells a story of potential borrowers who rush into securing a business loan or a line of credit because they only have eyes for the money. He says a little more thinking is required to see which option is the right one. “The lending game is like a courting process, and you're trying to find the match,” he says.

*One Picture x Prospa small business research, 2022