Small business ownership and management seem like a breath of freedom for an enthusiastic entrepreneur, but there are many unknowns that can quickly sabotage their best efforts. When it comes to financing your new business, you can do your best to prepare and plan, but things can pop up to ruin your good intentions. If you need to turn to a lender or investor, you need to understand the process of application and approval from each sector, as most small businesses are woefully unprepared when it comes to asking for money.
Seeking an Investment
Your bottom line reason for asking for money is because you need it, but where you go for the money will need details and a strategy to repay the funds. If you are going to seek an investment from a venture capitalist like Mark Stevens, the process will be completely different from what a traditional lender wants to see. An investor will want to know the potential for the business and will be keen on the long-term strategy for growth. The investor earns their money back through your success, with the more successful you become, the more money they make. If you seek investment from a traditional lender, like a bank, you are looking at a business loan. This will mean your business needs to be credit-worthy, as well as profitable enough to repay the loan. The lender doesn’t have time to wait until your business becomes successful to get the return on the investment, so instead, the bank or financier evaluates the potential red flags that might jeopardize repayment.
Flag #1- No Revenue
The threshold of revenue that your business should be consistently bringing in will vary according to the type of lender. Online lenders tend to have more lax requirements than a traditional lender. However, if your company can’t show that you have earned any revenue at all, you may not be approved a loan from any lender. Time can improve your numbers, but not all lenders want to assume that risk.
Flag #2- Inconsistent Cash Flow
In the hopes of keeping small businesses alive but without losing too much to a risky loan, lenders (both online and traditional) have begun to establish daily and weekly loan payments. Rather than waiting on a lump sum once a month, lenders are able to have the note paid through direct debit on the business checking account several times a month. Although this is much easier to manage than a large payment, a business with a spotty cash flow can’t reassure the lender that even a smaller payment will be made on time. It could take a year or two to establish the cash flow you need for a loan, but you aren’t without options for credit or financial help.
Flag #3- No History
Lenders need to know what you have done in the past with your credit accounts in order to predict what you may do in the future. If you have no credit history, it could be a red flag. Even though you may be on a solid financial footing, many lenders will require that you provide several years’ worth of business activity in order to validate or assess the risk. At the very least, some online businesses will accept an applicant with only a year of experience, and the U.S. Small Business Administration helps start-ups get off the ground when the credit score and finances are in place.
Flag #4- Weak Credit Profile
Almost as damaging as having no credit profile, having a weak credit profile can keep a lender from accepting your loan application. The length of time you’ve been in business could impact this assessment, but it could also be that you have relied on your personal credit for business needs. You can establish credit through vendors or through a business credit card.
Flag #5- Your Personal Credit
Many lenders are now taking the personal credit score of the business owner as an important factor for assessing business creditworthiness. Even though your personal score is the relationship between you and your personal obligations, there could be some overlap in spending and payment habits when it comes to your business account. Traditional lenders are very particular in this area, with personal credit becoming a priority in saying yes or no to a loan.
Flag #6- Finance Judgements
If there is a bankruptcy or financial judgment on your credit report, your business may get a loan but at a much higher interest rate. If you have had to file for bankruptcy in the past, work hard to establish good credit and repair your profile. It may take several years, but you can see your score go back and earn back the trust of lenders.
Without a strong credit profile and solid reporting of your company’s revenue and cash flow, it may be difficult to secure a traditional loan. You can always check with online lenders or private investors as potential financial resources.
