Is Your Business Fundable? An Analysis of Fundability

Your Best Business Financing Choices Are Out There

Every company needs business financing. Startups need it before they become profitable, and existing businesses may need it to grow—or to weather a crisis. Or a business may need cash to cover regular expenses, particularly if they give good payment terms to customers. 

Business funding helps with all of this.

What is Business Financing?

Also called business funding, it is essentially money which a business can tap to satisfy its needs. It comes in the form of both business credit and business lending. 

Company credit works for day to day expenses. But business lending tends to work better for larger issues, like replacing equipment, buying real estate, or starting a new product line.

Small businesses can and should avail themselves of both. 

Business funding is also readily divided by the chances a business will be able to get an approval. 

For example, a business owner with bad personal credit but also with consistent and verifiable credit card sales, is likely to qualify for a merchant cash advance. But they’re not likely to qualify for an SBA loan under most circumstances.

Small businesses can make it easier or harder when it comes to getting company financing. Paying bills on time, keeping balances in business bank accounts fairly high, and bringing in consistent revenue will all make it easier to get most forms of business funding.

But bad personal credit scores, inconsistent record keeping, and failing to pay bills on time will make it harder to get many types of business funding.

Types of Business Financing

Business funding means lending and credit. For lending, choices revolve around why you get approved.

There are loans for business owners with good credit. Another type of business financing centers on collateral you can offer. Another loan type is available based on cash flow. 

Business credit cards may require good credit or cash flow.

Term Loans

We’re much more likely to think of term loans from a traditional bank or credit unions when we think of business funding. But they may also come from online lenders.

Either way, term loans tend to be for a fixed term with payments that remain stable over time. The amount you pay in interest will depend on several factors. The interest rate you pay won’t necessarily be unchanging, either.

For a traditional bank loan, you will have to produce your business financials. You may need to furnish collateral, and must have a high FICO score. You also must have a business bank account.

SBA Loans

Established businesses with tax returns showing good revenues and profitability can get secured small business loans from the Small Business Administration.

The SBA’s most popular small business loans are the 7(a), the 504, and their microloan program.

7(a) loans are for buying real estate as part of a business purchase, working capital, refinancing current business debt, or purchasing supplies.

The maximum for a 7(a) loan is $5 million.

504 loans are long-term, fixed-rate financing to purchase or repair real estate, equipment, machinery, or other assets.

SBA microloans provide up to $50,000 to help businesses start up and expand.

Business Lines of Credit

A line of credit is credit extended by a bank to a business. The business can draw on it when funds are needed. Interest is charged the date the funds are drawn. 

A line of credit is often secured in some manner. One way to secure a business line of credit is with securities such as stocks or bonds. 

A business line of credit can have higher limits than business credit cards. While a business credit line is flexible, business cards provide more leeway when it comes to repayment schedules. There is no set repayment term for these cards. 

Business Credit Cards

Business credit cards can help a company build corporate credit effectively. Limits are often far higher than for personal cards. 

But issuers of these credit cards are not obligated to report payments and account history to all three business credit bureaus. They aren’t even obligated to report on positive payment experiences. 

Business credit cards, when they do report, will report to Experian, Equifax, and/or Dun & Bradstreet. Unlike with personal credit, your corporate credit report can be pulled by anyone. Hence if you don’t pay on time, and your business credit score is low, anyone can find out.

Even your competition.

Trade Credit

When you start building commercial credit, your PAYDEX score is either low or nonexistent. You cannot qualify for many types of credit. But you can still get trade credit approval.

Trade credit, or starter vendor credit, is much more readily attainable. You may have to provide a personal guarantee or funds as security. Your purchase may need to meet a minimum dollar amount before getting trade credit.

Trade credit is not an end unto itself. Rather, use it to buy supplies for your business, pay the vendor on time, and about 10% of vendors will report to credit bureaus like Equifax.

Equipment Financing

Use equipment financing to buy or lease equipment, tools, tech, or machinery for your business. The equipment serves as the collateral for a loan. Hence, if you cannot make your payments, your lender can seize the equipment to recoup their losses.

You can only use equipment financing to buy a specified piece or lot of equipment. Contrast this with a business term loan or business line of credit where you can spend funds flexibly.

Often, you need a decent down payment, like the first two monthly payments. And, in general, you will need a FICO score in the mid-600s or better.

Invoice Financing

For businesses with irregular cash flow because they’re often waiting for customers to pay for provided services or products, invoice financing (invoice factoring) can be a good funding option.

It’s an especially easy small business loan for B2B businesses with long invoice cycles. You can get paid immediately rather than waiting for customers to pay you. 

Businesses offering longer term financing are still paid fast.

The main difference between this form of debt financing and merchant cash advances (below) is that this form of business funding is based on invoices. And merchant cash advances have a basis in credit card payments.

Merchant Cash Advances

Businesses which take credit cards can get paid a percentage while waiting for customers to pay them.

With MCAs, approval is based on cash flow. Get funding based strictly on cash flow as verifiable per business bank statements. 

In general, you will need to provide a few months’ worth of bank statements, and will need to be in business for several months. You will need to prove you have few charge backs or NSFs in your account.

This program works well for entrepreneurs with poor personal credit—because personal credit is never reviewed! But it also has extremely high interest rates.

Commercial Real Estate Loans

With a building serving as collateral, commercial real estate loans can often be for a very high loan amount. This isn’t like working with an equal housing lender for a fix and flip. And personal credit quality can generally be as low as a FICO score in the low 600s.

For approvals, lenders will want to see bank statements, evidence of good management of business bank accounts (positive balances, no NSFs), a real Estate Asset List for collateral, and a personal financial statement.

Commercial real estate loans include conventional property financing, money for investment properties, hard money loans, bridge loans, and loans to buy commercial real estate.

A personal guarantee may be required.

Microloans

Businesses not needing a lot of money can get a smaller business loan, often up to $50,000. The SBA and microlenders offer microloans.

Since the amount available is lower, microlenders may be able to forgive poor personal credit. Or, they may make allowances for startups, which by definition don’t have a lot of time in business.

Loan issuers may also be able to accept businesses which have not yet built company credit. But if the small business owners have good personal credit scores, that will help even more. 

Microloans make it easier for women, low income, veteran, and minority entrepreneurs to get small business funding.

Cash Flow Loans

In general, cash flow loans are an umbrella term covering:

• Merchant cash advances, account receivables financing, and purchase order financing
• Business lines of credit
• Invoice financing
• Unsecured business term loans and
• Short-term small business loans

Each financing option is based on a business’s provable cash flow. Often, personal credit quality is not a part of the lending process. The cash flow—if it can be readily proven with receipts, records of credit cards, accounts receivable or the like—does all the talking.

This can make them good choices for business owners who have poor personal credit and have not yet built business credit.

Crowdfunding

Crowdfunding is where you can make a pitch for money without selling equity in your business or depending on your savings or credit rating. 

All you invest is time. And, often, money, because donors respond better to crowdfunding campaigns if the presentation is more professional. 

If you have a compelling story, an interesting product or service, and communicate well, crowdfunding can be a way to get cash. But not every campaign succeeds.

If you succeed, you’ll have to give the crowdfunding platform (like Kickstarter) a cut off the top.If you don’t succeed, you usually have to give the money back. 

Grants

With a small business grant, you can also get cash without selling business equity or relying on credit. Here, your time investment is spent writing a grant proposal. 

These proposals are a form of persuasive writing. If you’re not a good writer, enlist or hire someone who is.

Check for federal, state, and local grants. Grants usually aren’t for a lot of money, so you will need another funding source. Competition is fierce!

A business with minority ownership may have an edge. Small businesses might also have better success if they fulfill a major need helping local economic development, like rural electrification.

Angel Investors

Angels are informal investors in a business. Unlike crowdfunding, an angel investor is purchasing a piece of your business. Hence, they share in the profits, and may want to share in the decision making process.

There are people who are professional angel investors who have backed many different startups. Often, they have significant capital at their disposal. But you don’t need to work with a professional angel investor.

An angel investor can also be people you know well, or not so well. Family, friends, classmates, and local business owners may want to invest in your business.

You’ll never know unless you ask.

Venture Capital

Working with venture capitalists, like angel investors, means you are using equity financing to help your business. But unlike angels, they are solely professionals. 

They won’t invest in mainstream companies unless you’re truly changing the paradigm. And, they are looking to buy a much bigger stake.

With VCs, one of the things they are buying (when they invest in your company) is the ability to direct its mission and decisions. A venture capitalist firm will want seats on your board of directors.

If they have a majority share, they may even kick you off the board of directors of your own company! So pay attention to investor relations.

Factors Affecting Financing

Factor 1 – Your Personal Credit Score

Like it or not, your FICO score will affect if you can get business money. Entrepreneurs with about a 670 or higher will generally see more options and better interest rates. 

Business owners with a dismal personal credit score probably have to secure business financing, even with bad credit. Interest rates are high—poor personal credit is expensive.

And business owners with an excellent personal credit score will have the most and best choices, and will be able to get working capital easily.

Factor 2 – Your Business Particulars

If your industry is risky, putting the industry name in your business name makes it harder to get financing. If your business address is just a post office box, you’re also hurting your chances.

No separate business phone number can make it harder to get money.

No website means a lender investigating your business on the internet won’t learn anything from you.

Can you trust Facebook, Twitter, or your competition to put your company in the best light?

Factor 3 – Your Business Financials

From your business tax returns to your business bank account statements, lenders will want to see how your company manages working capital 

If there are missing or incomplete tax returns, they will negatively affect your business’s ability to get financing. 

Professionally prepared business financials go a long way to assuring lenders and credit issuers that your business can handle the costs of a loan or credit. And, they serve as an assurance that your company is being managed responsibly.

Factor 4 – Your Business Bank Account

Having a business bank account at all will directly affect your ability to get small business financing. But it’s not enough to just have an account.

Lenders will check your business’s money management habits here, too. Accounts with several NSFs (nonsufficient funds) or inconsistent deposits will have a harder time of it. 

But businesses with consistent deposits, stable balances, and few if any NSFs will be more likely to get approvals. If the account is with the lender, then the lender will already have a good idea of your company’s ability to pay back any small business loan.

This can help with approvals.

Factor 5 – Your Financing Application

Did you know that even your small business financing application can affect whether you’ll get capital?

Beyond filling out the application completely, truthfully, and correctly, it also means applying when your finances are at their best (for example, right after you’ve landed a big order). And it even means how you apply.

Is it better to apply in person, by snail mail, over the phone, or via email? In person often means you can explain any irregularities better.

Factor 6 – Fundability™ in General

Fundability is the ability of a business to get financing. This means getting everything you need in order. It means fulfilling legal obligations like registering with the IRS to pay taxes, and getting all appropriate licenses.

Fundability is also ensuring your information is perfectly consistent everywhere—even using an ampersand (&) vs “and” wherever you write your business name.

Businesses which pay attention to Fundability are more likely to get to “yes” when applying for small business financing.

How to Determine How Much Funding You Need

According to Lendio, it makes sense to create detailed cost projections for how you will use any borrowed funds. 

Prepare financial projections, including profit & loss and cash flow statements. This is to estimate the revenue that you will generate by taking out a loan. It is also to best estimate your costs. 

This will not only help you determine the amount of capital that you need. It will also show lenders that you are responsible and informed. And realistic.

Consider how much the capital will cost your business in interest, closing costs, and other fees.

Also make sure to think about what the cash will do for your business’s future costs and growth projections. If a loan is too small to really make a difference, you should rethink your calculations. Or put off getting a loan until you can get more money.

And, if your business is relatively new or has other obstacles to borrowing a lot of money, you may need to be strategic with the amount you borrow. 

That is, you may do well to borrow less now and pay it back responsibly—and use that good record with a lender to leverage borrowing more money in the future.

FAQs

What is the Best Way to Finance a Small Business?

The best way is to get business funding at the best possible terms that you can. Get the capital that will cost your business the least in interest and with the longest time to pay it back.

Improving personal credit scores and all-around Fundability will get a business owner better terms.

How do I Qualify for a Small Business Loan?

Lender qualifications vary. Business owners will do well to check them closely and only apply where their chances are good—or determine how to improve their chances.

For example, building corporation credit before you need it can give you an edge. Making your business more attractive to lenders can only help you.

What is the Most Common Form of Financing for a Small Business?

According to the National Small Business Association’s Mid-Year 2018 economic report, the most common form of financing was credit cards, at 35%. Thirty-one percent financed their businesses with company earnings.

Large bank loans and borrowing from friends and family were each at 13%. 

Least popular? Crowdfunding and account receivable financing.