Getting a business off the ground is easier when you have a little cash in your pocket. But as many business owners can attest, financing a new venture or existing small enterprise can be tricky. Banks and other lenders are often reluctant to make loans to companies with no credit history, few assets and unproven revenues.
Don’t despair yet. With some basic strategic planning, you can secure the financing needed to start or grow your business. From boosting credit scores to building revenues, here are four tips for making your business “bankable.”
Tip 1: Boost your credit
Credit scores are one of the first things lenders look at when deciding whether to fund your business. So beware — as a business owner, if you don’t have an established business credit history, your personal credit scores will be used to gauge your credibility. According to Linda Ferrari, a credit score expert with Credit Resource Corp and author of The Big Score: Getting It and Keeping It:
“When you’re using your credit for business transactions, there is not one single action that is more important than being proactive in looking at your credit as early as possible. Once you know what you’re dealing with, you can start taking steps to boost your scores before you apply for a loan.”
Ferrari, who has helped improve the credit of thousands of business owners and consumers, recommends following these four steps to get credit in order:
Set your score goal.
All three of the major credit bureaus use FICO scores to judge creditworthiness. These scores range from 300 to 850. According to Ferrari, the goal you set should not be less than 750.
Get your credit reports.
Order your reports from each of the three main credit bureaus — Equifax, Experian and TransUnion. You can do this online, by phone or through the mail. Note that you’ll also specifically need to request your credit scores, which are not included with your credit reports, and must be purchased separately.
Create a spreadsheet that itemizes any mistakes you may find in your credit report. Your spreadsheet should contain the information you’ll need to make a formal dispute with the credit bureau. This includes the type of transaction you’re disputing (is it a collection, late payment, wrong name?), the reason for your dispute, and information about the creditor the mistake pertains to (name of bank or credit card company, account number, etc.). Ferrari recommends creating one of these spreadsheets for each of the three reports you’ve received. For each item that needs attention, you’ll also need to decide what action you’re going to take: dispute or negotiate.
To dispute an incorrect item on your credit report, start by sending a certified letter to the credit bureau that clearly details why you are disputing the information. You should also provide proof that the information on your report is incorrect, i.e., bank or credit card statements that show you have, in fact, paid down a debt.
If you have outstanding debts listed on your report, you may also want to consider negotiating those debts with creditors. You can learn more about debt negotiations online from the Federal Trade Commission or the National Consumer Law Center. Once you’ve done your research, you can start a conversation with creditors about how much of your debt you can realistically afford to pay.
Tip 2: Build your assets
To secure a loan, most lenders require that business owners possess some sort of collateral. However, not all companies have business assets — like real estate, computers or equipment — that they can use for this purpose. Many business owners therefore use personal assets, like a home or car, to secure financing for their business.
But as Edward Rogoff, a professor of entrepreneurship at Baruch College’s Zicklin School of Business and author of the book Bankable Business Plans, explains, putting your personal assets on the line is risky. If you can’t pay back your loan, you could end up losing your home, car or other personal property as well as your business. Rogoff recommends acquiring assets through your business instead. Here are two ways to do it:
If you haven’t already established relationships with investors, now may be the time to do so. Wealthy backers, Rogoff notes, can provide the funds you need to buy assets through your business. You can later use these assets to secure a loan with a bank or other lender.
Depending on how comfortable you are with the idea of bringing on equity partners (who may want a say in how you run your company), you can choose to seek out funding from an angel investor or, keep things simple and ask friends and family to invest in your business.
Consider a SBA loan.
The Small Business Administration (SBA) guarantees several different types of loans for small businesses (which the SBA generally defines as 500 employees or less for manufacturing and mining or a maximum of $7.5 million in annual receipts for most non-manufacturing industries). One of these loan types, the CDC/504 Loan Program, is designed to help companies purchase real estate and equipment. If you want to acquire assets for your business — either to help you secure another loan in the future or simply because you need those assets — these guaranteed loans are worth exploring.
Tip 3: Update your financial projections
If you’ve started a business, then chances are you already have a business plan — including financial projections — in place. (And if you don’t, you should.) But before you approach lenders, you’ll want to make sure that the plan you started with still reflects where your business is headed.
“Lenders don’t like pie-in-the-sky projections,” warns Rogoff. “The more you get away from your financial projections being guesses and the closer you get to anchoring your projections in reality, the more comfortable a lender is going to be with your business.”
To update your financial projections, you’ll have to reassess a few key components affecting your business’ finances, including:
- The size of your market
- Your customer base
- The cost of running your business
Be sure to consider how these components have changed since you first went into business and calculate your new financial projections accordingly.
Tip 4: Get to know lenders
Perhaps not surprisingly, visiting the bank is an integral part of making your business bankable. Whether you plan on funding your business through a traditional bank or are considering alternative loan options, you’ll want to start forming relationships with lenders before you’re ready to ask for a loan.
“It’s good to start to build relationships with banks, even if they don’t lend you money,” Rogoff advises. “That way they can begin to feel comfortable with you and follow you.”
The professionals at alternative lending institutions can also help you prepare for the loan application process and provide you with insight as to how to better your chances of receiving funding.
“[Lenders] have people there to talk to, who may know about your industry,” Rogoff explains. “And even if you don’t get a loan in the beginning, you might get one later.”
Ferrari also stresses the importance of making connections with lenders. But she suggests that before you race off to the bank, it’s best to first prepare yourself for the loan application process and fix the things that are within your control. First impressions, Ferrari says, are highly important when establishing new relationships with lenders.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.