Side hustle surge: Why low unemployment is not stopping new business creation

Americans are launching more businesses despite relatively low unemployment rates. This trend is driven by two main factors: underemployment and high inflation. Many workers feel the economy is poor because wages are low or hours are insufficient, while the cost of goods has risen sharply. As a result, affordability has become a primary motivator for starting side hustles or full-time companies.

New entrepreneurs often face a critical blind spot regarding funding. Most have never run a business before, leading them to underestimate expenses. They frequently overlook hidden costs such as government fees, software subscriptions, and professional memberships. These costs, combined with standard expenses like payroll, marketing, and production, accumulate quickly. This financial miscalculation can derail new ventures before they establish a foothold.

Experts advise that individuals secure business credit while they still hold W-2 jobs. Stable income from employment helps maintain a strong personal credit profile. This profile is critical for accessing business credit. Once a person transitions to entrepreneurship, their income becomes uncertain. This uncertainty can cause their personal credit score to decline, making it harder to secure favorable funding terms later.

Understanding the mechanics of business credit is essential. Contrary to claims made by social media influencers, applicants must sign a personal guarantee to secure business funding. This means the individual is personally liable for repaying the debt if the business fails. Lenders pull the applicant's personal credit report to verify their ability to repay. This inquiry appears on the personal credit profile and remains there for two years.

Most business credit accounts do not appear on personal credit reports. However, if a business account becomes delinquent, that status will show up on the personal profile. Over time, a strong business credit profile allows for greater funding access, though a personal guarantee is almost always required. Applicants do not need current business revenue to qualify, as approval is based on the personal guarantee.

Funding strategy should align with specific business goals. Experts advise against using funds for speculative opportunities, such as unproven products that may take a long time to gain traction. Instead, funds should be used to scale existing marketing channels that have already produced consistent results. Entrepreneurs should run financial projections based on real-world data. For new businesses, these projections should be conservative to ensure debt can be repaid quickly from projected revenue, even if traction is slower than expected.

Timing is a key factor in funding strategy. Business loans often require extensive documentation and carry high interest rates. Payments on these loans begin immediately upon securing the funds. In contrast, business credit cards are simpler to obtain. Many offer 0% introductory interest rates, making them free to use if the debt is paid within that period. Entrepreneurs can then secure new cards to restart the 0% rate cycle.

Business credit cards can be used for most expenses covered by loans. Exceptions include purchasing cryptocurrency and cannabis-related items, depending on the specific lender. The goal is to use these tools to get a business off the ground faster and scale effectively. This approach helps companies carry through lean periods. Used properly, this funding strategy can provide a significant advantage for new ventures.