Convincing a lender of your need and viability as a business can often be the biggest hurdle

There comes a time for virtually every small business when the need to secure outside financing arises. Whether it’s to fund day-to-day operations, invest in new equipment and inventory, or simply have enough cash on hand to get through slower seasons, many business owners rely on outside financing.

But while funding opportunities abound, convincing a lender of your need and viability as a business can often be the biggest hurdle. It’s a stressful, complex, time-consuming process. Here are three categories a small business owner should keep in mind in order to get in and stay in lending shape and increase your chance of approval.

1. Before applying keep a clean house.

Before you ever need to apply for financing — whether it’s through a traditional bank loan or an option from alternative lenders such as Alternative Loans, lines of credit, bridge loans or a SBA Loan — there are actions you can take to prepare.

A lender will look at four primary factors to determine your eligibility. In order of importance, they include cash flow, time in business, credit score and collateral.

Cash flow: It may go without saying, but every business should ensure its books are accurate and updated.

In addition, lenders primarily underwrite by looking at the inflows and outflows of your business’s bank account. Key metrics that a lender will look at are average daily balance (the higher, the better), volume of deposits and total number of non-sufficient funds (NSF).

Time in business: Much like credit, the longer you can demonstrate a track record of your time in business, the better. It’s critical your business is registered locally and your nine-digit tax information is registered appropriately.

Credit score: Your personal record of financial management is just as important as your business’s. After all, it’s indicative of overall management and attention to detail. Not sure what your credit score is?

Collateral: Assets are crucial when it comes to securing financing because the lender needs reassurance that there’s a way to recoup costs if the loan defaults. Be sure to document all equipment, property and anything that could qualify as an asset under management, along with the associated value as each asset is added to the business.

If you can check all four boxes, you’ll have the best chance at getting the right loan. Conversely, if you have zero boxes checked, you’re unlikely to be approved. If you happen to only have one of the four, there might be an option, but with a higher interest rate or less than favorable payment terms increasing your cost of acquiring the capital you need.

2. During the process leave no stone unturned.

Once it’s time to apply, get your ducks in a row. Lenders will review your application with a fine-toothed comb, looking for discrepancies, omissions, and any reason to deny your request. To improve your chances of securing financing — and doing so quickly — there are some items you should expect to provide.

Bank statements: Be ready to provide a minimum of three to six months of bank statements, but note that your profit and/or loss over the last two years are usually the most relevant metrics. Be sure you can provide detailed information for that period of time. Without it, lenders can’t properly assess your business and need for financing.

Tax returns: Depending on the loan product, there’s a good chance lenders may want to see tax returns over the past two years. Have those on hand in both printed and digital copies when possible.

Current debts and credit: You’ll also be expected to provide information on all debt such as leases, liens and credit adjustments. For all property expenses like mortgages, be sure this information is current and on-hand.

For further background, there’s a chance the lender will conduct interviews with your coworkers or landlord, so prepare all your associates and contacts for a potential call.

3. Getting the “right” financing for you.

At the end of the day, your goal is to secure financing and affiliated terms that are right for your business right now. Remember, a “good” loan depends on the intended need.

With all the options, available and constant changes to the lending space, many business owners skip over some crucial details and believe the lowest rate is the best loan, but that’s not always the case. The best loan could be the largest loan size, longest repayment terms, fastest to fund and arrive in your bank account, or the lowest payback amount.

In reality, it depends on how soon you need the loan, how much you can afford to pay back, the duration of time you need the loan for and how much effort is needed to acquire the loan. Ultimately, it boils down to whether the cost associated with acquiring financing will help grow your business in a way you wouldn’t be able to otherwise.

By determining your financing needs and cost you’re willing to absorb to grow, you’ll have a better idea of the type of financing and terms you’re willing to accept. At every stage of growth in your business, be sure to stay in lending shape by dotting your i’s and crossing your t’s along the way so nothing can slow you down.

The Biggest Reason Banks Deny Loans to a large number of Small-Business Owners

No one ever promised that the challenges to growing a small business would be small. Entrepreneurs regularly confront issues that can threaten the very core of their companies, not the least of which is difficulty securing the financing they need to run and grow a sustainable business.

Premier Business Lending, a turnkey financial company in El Dorado Hills CA found finding capital is becoming harder for a significant proportion of small businesses despite the wider variety of financing options available. Even though there are more lending options for small businesses than ever before, a crucial step is missing in the process; and no one is paying attention, leaving business owners increasingly frustrated over their rejections for credit lines and loans.

The dream and the reality don’t add up Premier Business Lending discovered a scenario confirmed by a new Creditera survey of 250 small and midsize businesses, which brings to light the struggle around bank financing, small business loans and the rejections small businesses suffer.

The realities small businesses face

The Small Business American Dream Gap Report examined today’s economic landscape compared to a year ago and found that despite the positive outlook for small businesses, nearly three out of 10 small businesses reported finding it harder than in the past to reduce operating costs. A quarter of small businesses, meanwhile, found it harder to plan for unforeseen expenses. Within the previous year, the survey revealed, 20 percent of the small businesses surveyed said they had considered shutting down, primarily because of lack of growth or cash issues.

Those kinds of struggles had led 53 percent of those small businesses to apply for funding or credit lines over the past five years — and more than one in four said they had sought loans multiple times. Yet, 20 percent of those applying over the past 60 months reported being turned down, and 45 percent of those denied said they’d been rejected more than once. The most frustrating finding was that nearly a fourth — 23 percent — of these businesses didn’t know why they’d been denied.

As a result, 26 percent of business owners avoided hiring and expansion because, they said, they were frustrated with trying to access funds. Instead, they ponied up the money from their pockets and personal accounts. Those unable to tap into alternative funding sources turned to personal finances to cover expenses and keep their businesses going, a practice that put them at substantial risk.

In addition, the study determined that the last time the small business owners surveyed had needed funds, 62 percent had withdrawn personal savings, 22 percent had used business credit cards, 24 percent had used their personal credit cards and 10 percent had relied on family and friends. Only 36 percent of those seeking funds had obtained bank loans.

The crucial, yet missing, link

The study revealed that a primary reason small businesses can’t obtain bank loans is their failure to understand their business credit score. Some 45 percent of entrepreneurs surveyed didn’t even know they had a business credit score. And 72 percent didn’t know where to find information about it. Even when they did, more than eight in 10 small business owners surveyed acknowledged that they didn’t know how to interpret their score.

Education and empowerment around creditworthiness is a core issue, and can make or break a small business’s ability to get financing. Many business owners starting out are unaware of business credit, and may do significant damage to their credit without realizing it — primarily by maxing-out personal credit cards and/or credit lines because they believe they have no other choice. This short-term approach leads to significant long-term damage.

Need more information about business credit? Consider the FICO score. Just as every individual consumer has a one based on his or her personal credit record, every business has one developed by the FICO Liquid Credit Small Business Scoring Service — the FICO SBSS score. Banks use this score to evaluate term loans and lines of credit up to $1 million.

The score further rank-orders small businesses by their likelihood of making on-time payments, based on their personal and business credit history, along with other financial data. On a scale of 0 to 300, a small business must score at least 140 to pass the pre-screening process the SBA sets on its most popular loan — the 7(a) loan.

If a business with poor credit history — or none at all — is denied financing, lenders are not required to notify the owner of the reason for the rejection.

It’s crucial, therefore, for business owners to learn about their SBSS score and build credit, with timely payments to vendors and suppliers to keep that score up. Boosting the score may take years for companies with a derogatory or nonexistent credit history, so the process of strengthening creditworthiness needs to begin long before a credit application is submitted.

A number of business credit bureaus will generate a business credit score, including Dun & Bradstreet, Equifax, Experian and FICO. Anyone can purchase a business credit report from Dun & Bradstreet, Equifax or Experian, but it comes at a cost.

Until recently, there was no direct way to access the FICO SBSS score, but Premier Business Lending out of El Dorado Hills Ca while researching for small businesses found that you can now get that number through Creditera’s subscription service. It’s the only place small businesses can get that score online.

Why all of this matters

Ultimately, those who understand business credit are better positioned to succeed. The study found that nearly 40 percent of small business owners who didn’t know their business credit score anticipated growth of less than 5 percent, while nearly three quarters who did, envisioned growth of up to 20 percent.

Another answer to the perplexity surrounding rejected funding came from a revelation in the study about owners’ understanding of credit issues. The small business owners surveyed who understood their business credit scores, the study reported, were 41 percent more likely to be approved for a business loan than those who did not. And they were 31 percent more likely to consider expanding their businesses.

Some 80 percent of those in the know about their scores, moreover, considered their funding process to have been smooth, and half of those owners indicated that they were less likely to turn to personal savings to grow their companies.

Business owners, then, should determine where they stand, and take control of the factors critical to the lenders, credit card companies and even other businesses they work with. When owners understand their scores, they have an easier loan approval experience, are empowered to grow and thrive and help the overall economy thrive. That way, everyone wins.

These days there’s nothing traditional about small business financing. You see, the credit crunch of 2008 created a lending gap: Traditional banks want to loan a half-million dollars or more, but most small businesses only need $250,000 or less.

Traditional lenders rarely look twice at a small business any more, and when they do, only 20% of applications pass muster. These are not very encouraging numbers for small business owners who want to take it to the next level sometime this generation.

What’s a small business owner to do? SBA-backed loans are still the most affordable, but they take forever to process, require a back-breaking pile of paperwork, and are only given out to a very select few since the rules are so strict.

Luckily, nature abhors a vacuum. To fill in the gap, the list of alternatives is growing all the time, which is both a good thing and a bad thing, depending on how well you handle a headache-inducing list of options. Lines of credit, term loans, factoring, merchant cash advances, invoice financing—look, it’s great to finally have choices, but it all sounds like synonyms for “out of my league.” So how do you know what’s right for your business? Glad you asked.

Let’s start with online, also known as alternative, lenders. If an established business can show it is growing successfully, an alternative lender will often provide an infusion of capital to keep up the momentum because they believe in the company and its owner. Since you are not dealing with a bank, but a company that is lending its own money, their analyses and criteria are very different from a bank’s.

It’s also faster and easier to get approved than it would be at a traditional bank, though neither the fastest nor the easiest. Their offerings range from term loans to lines of credit, inventory financing to receivables factoring.

If you want something even faster and easier, consider daily debit or merchant cash advances (MCAs). An MCA lender gives the owner a pile of cash in return for a percentage or flat amount of the business’s daily sales. The great part is how quick they are, and they are even less stringent than online lenders that offer more traditional financing options like term loans and lines of credit. The not-so-great part is the extremely high rates you pay for your money. Also, if your income tends to fluctuate month by month, or day to day, this may not be the best option for you.

In the world of small business financing, the more options, the better.

One of the many factors that a lender considers when evaluating the credit worthiness of a business is their track record. This means the longer the business age, the longer the track record. This can present a huge disadvantage for newer businesses and recent start-ups.

In fact, according to the SBA, as a potential loan applicant, an owner of a new business needs to show evidence that there is a track record of profitability and success in a similar business endeavor.

The business age impacts the business credit profile which a lender uses to make decisions about your business. In other words, the more years of credit history that demonstrate your business can properly use and repay its business loan obligations, the better.
 

“Thin” Credit Profiles

If you’ve ever been told that your business credit profile is too “thin,” this simply means there’s not enough credit history to accurately evaluate your business. A potential lender tries to predict what your business will do in the future based upon what it has done in the past.

Consequently, if your business has a lengthy track record of borrowing, making regular payments, and repaying debt in a timely manner, your business may be a better risk than a company with a very short history and business age.

This means that if you’ve only been in business for a year or two, you’ll need to take some time to build a strong credit profile. The downside is that there are no real shortcuts to building your profile. Although there are no quick fixes, there are steps you can take.
 

5 Tips for Building a Solid Credit Profile

Here are some things you can do now to build a profile despite a shorter business age when looking for a small business loan:

1. Realize it does take time: Be prepared to invest some time. The good news is that 12 to 24 months of effort and positive activity will be make a significance improvement in your credit profile.
2. >Know your credit profile: Your business profile is made up of your credit history and details about your business. It includes information such as your time in business, your industry, and other similar information. It is critically important to be sure your information is accurate.
3. Stay current with all your bills: The best way to build a strong profile is to pay all your business bills on time. Having a lengthy business age doesn’t matter if you make many late payments. Too many late payments will quickly hurt your business credit profile.
4. Don’t rely on personal credit: When starting a business, many entrepreneurs will use the equity in their home or personal credit cards to finance it. However, this does not build your business credit profile. Having a business credit card or credit from vendors and suppliers is a good way to establish business credit.
5. Be sure your credit history is being reported: If it’s not, you may be building a good credit relationship with card companies and vendors without building a strong credit profile. No matter your business age, no reporting won’t help you.

Also, check to see where your credit history is being reported. For example, many online lenders report to the bureaus while others like merchant cash advance providers typically do not.
 

Overcoming The Short Business Age Burden

Building a strong business credit profile is one of the most important things you can do to access borrowed capital with a shorter business age. And this can take time.

However, these five tips will help you build a business credit profile that will provide you options when it comes time to apply for a small business loan.

If you’re starting a business or looking to grow your existing business, a small business loan may be a viable financial strategy. Keep in mind that when you repay a small business loan, however, you’ll end up paying more than the amount borrowed because of interest, amortization, and business loan fees.

All small business loans come with interest that the borrower pays to the lender and loan rates can be varied or fixed.

Variable rates change over time as market interest rates shift. If market rates are high, a variable rate can be a good idea since the loan rate will decrease if market interest rates drop.

Fixed rates lock in the market interest rate at the time a borrower takes out the loan. If market rates are low, it’s wise to get a fixed rate and maintain that low interest rate throughout the duration of the payment schedule.
 

Understanding Amortization

The loan’s term, or how long it takes to pay off, affects the overall cost of the loan because it determines how long interest is paid. This is known as amortization which can be defined as the gradual repayment of a loan in equal (or nearly equal) installments which include portions of interest and principal amounts.

Although interest is not typically considered in the same category as business loan fees, it is still part of your cost for borrowing a sum of money. Calculating your amortized interest payments is done with a payment, or amortization schedule. This is a plan for paying back a loan in regular monthly increments.

Each payment consists of principal and interest. For example, assume you have taken out a $100,000 loan for five years with a 5% interest rate. Each month, you’ll repay $1,887.12 in principal and interest.

At the beginning of the term, the larger portion of your payment is interest. Consequently, $416.67 of your first payment is interest and $1,470.46 goes towards the principal.

With each payment, the interest portion decreases and the principal payment increases. In our example the interest amount has decreased by $6.13 on the second payment and the principal portion increased accordingly:

In the final month, you would only pay $7.83 in interest and $1,879.29 in principal to pay off the loan.
 

Looking at Other Typical Business Loan Fees

As a borrower you will also have to pay business loan fees. Most common are origination and guarantee fees, but some lenders will have additional costs. Often you will have to pay interest on any fees that are added to the loan rate. This increases not only the amount loaned, but the total interest charged as well.

Origination fee – An upfront fee that is charged for processing a new loan. Lenders charge borrowers this fee for processing a loan application and other administrative work involved. It’s taken as a percentage of the total loan, for example, 1% of a $100,000 loan.

Guarantee fee – For SBA-guaranteed loans, lenders pay the government a portion of the amount guaranteed. Many lenders pass on part of this cost to the borrower.

Underwriting fees – These are business loan fees collected by underwriters who verify and review all of the information you’ve provided.

Closing costs – These business loan fees can include other costs associated with servicing the loan such as a loan-packaging fee, a commercial real estate appraisal or a business valuation.

Unfortunately, business loan fees are unavoidable and can add a significant amount of money to your loan. Each lender should give you a list of what each fee includes and should explain any fees that you don’t understand.