Getting funding for your small business is essential but not always as straightforward as you might think. Here are 7 small business funding facts you might not know about but should.
Small Business Funding Facts
1. You Need to Keep a Positive Ending Balance
Hanna Kassis works for Segway Financial. He says a small business should not only have money in a bank account before they apply for a loan, but a specific amount at month’s end.
“Lenders want to see that you’ve got a positive ending balance,” he says. “Say you’re anticipating needing a merchant cash advance at the end of the month, go put $500 dollars in your bank account.”
The emphasis on a positive ending balance underscores the importance of cash flow management for small businesses. It’s not just about having funds in the bank but demonstrating fiscal responsibility and the ability to manage resources effectively.
Entrepreneurs should prioritize cash flow monitoring and forecasting as central components of their financial planning to meet lenders’ criteria and secure funding more easily.
2. Your Personal Credit Score Affects Your Business Financing
Many small businesses like sole proprietors don’t know this when they try to get financing. However, if you’ve been through a personal event like a divorce that has dented your personal credit, your ability to get a loan can be affected.
Having a good business plan will help tip things in your favor.
The intersection of personal credit and business financing highlights the blurred lines between personal and business finances, especially in the early stages of a business. This connection necessitates that entrepreneurs maintain robust personal credit health alongside their business financials.
Regularly monitoring personal credit scores, disputing inaccuracies, and managing personal debts wisely can enhance a business owner’s financing options.
3. Personal Bankruptcy Doesn’t Always Spell Rejection
Your personal and business finances are often tied together in a lender’s eyes. However, a personal bankruptcy doesn’t always mean you’ll be rejected for a business loan.
Still, you’ll more than likely need to be patient. Personal bankruptcy can stay on a credit score for 7 years. What’s more, many lenders prefer you wait at least 2 years before you apply for a loan.
You can repair a credit score in the meantime by paying bills on time.
The possibility of securing funding post-bankruptcy offers a glimmer of hope for entrepreneurs who have experienced financial setbacks. It emphasizes the value of resilience and strategic financial rebuilding.
Business owners can work towards improving their creditworthiness post-bankruptcy by maintaining transparent communication with potential lenders, demonstrating steady income, and presenting a compelling business case that highlights the viability of their business model.
4. Building a Financial History Can Start Small
It’s important to have a good financial history to get a business loan. Experts like Yumi Clark, VP of New Product Development at Capital One Spark Business, suggest you start small if you need to build one up.
“One of the best ways for business owners to prove their reliability, business savviness, and leadership is to establish a good financial history,” she says. “Microloans can help you build financial history that demonstrates you’re worthy of bigger loans in the future.”
Building Financial History Through Microloans
The strategy of using microloans to build a financial history is a testament to the power of starting small to achieve bigger goals. This approach allows entrepreneurs to establish a track record of timely repayments and financial reliability, paving the way for larger loans in the future.
Engaging with microfinance institutions or SBA microloan programs can be an effective starting point for businesses looking to build or improve their credit profiles.
5. Hesitation Creates Doubt
Hesitating after you get the contract creates a doubt in the lender’s mind that can cost you the funding. Hanna Kassis explains.
“If you get the contract and sit on them and time passes, lenders have to re underwrite the file. If there’s hesitancy on the part of the client, lenders start looking for things they weren’t before as a way out.”
Small business should be ready to go through to the end once they start the process.
“Money waits for no one,” Kassis says.
Understanding that hesitation can lead to doubts in a lender’s mind underscores the importance of decisiveness and preparedness in the financing process. Entrepreneurs should approach the loan application process with a clear plan and readiness to proceed.
This includes having all necessary documentation prepared, a well-thought-out business plan, and a clear understanding of the desired loan terms and conditions.
6. A PO Box Can Sink a Deal
The information required on any application is typically straightforward—name, address, business details, etc. However, a common mistake that can be a deal-breaker is using a PO Box as your business address.
Lenders often view a physical address as a sign of stability and legitimacy.
A PO Box can raise suspicions and may lead lenders to believe that you are trying to hide something or that your business is not well-established.
This principle applies to both your personal and business information. Being transparent and providing accurate and complete details is crucial for building trust with the lender.
If you operate from home and are hesitant to share your personal address as your business address, consider using a virtual office address or a coworking space address.
These alternatives can provide a physical address without compromising your privacy.
The preference for a physical address over a PO Box by lenders highlights the importance of perceived legitimacy and stability in the eyes of financial institutions.
Small business owners working from home or without a dedicated business location should consider options like virtual offices or shared workspace addresses to meet this requirement without compromising their privacy or security.
Remember, transparency and accuracy are key when applying for business funding. Providing a physical address instead of a PO Box is a simple yet essential step in this process.
7. Incomplete Applications Raise Red Flags
Missing something as small as a digit in a social security number or ZIP code can be a red flag to lenders. Quite often missing any of these details can cause them to start searching on the Internet to see if there’s any bad content on you posted there.
Double check your input or get a trusted person to look it over before you send it.
Submitting an incomplete application can raise several red flags for lenders. Here are a few reasons why it’s crucial to double-check your application before submission:
- Indicates Carelessness: Missing details, no matter how small, can indicate a lack of attention to detail and carelessness. Lenders may question your ability to manage your finances or run your business effectively if you can’t complete an application accurately.
- Delays Processing: Incomplete applications often require additional follow-up from the lender, which can delay the processing of your application. This can be a significant disadvantage if you need funding quickly.
- Triggers Additional Scrutiny: Missing information can cause lenders to dig deeper into your background to ensure there are no hidden issues. This additional scrutiny can delay your application and may even result in your loan being denied.
- Impacts Credit Score: Some lenders may perform a ‘hard’ credit check as part of their additional scrutiny, which can negatively impact your credit score. Multiple hard checks in a short period can be particularly damaging.
- Reduces Chances of Approval: Ultimately, an incomplete application reduces your chances of loan approval. Lenders may view it as a sign that you are not genuinely interested in the loan or that you are not organized enough to manage the loan and its repayments.
The emphasis on the completeness and accuracy of loan applications speaks to the critical nature of attention to detail in the financial aspects of running a business. Entrepreneurs should treat the loan application process with the utmost care, ensuring all information is accurate and comprehensive.
Utilizing checklists, seeking assistance from financial advisors, or employing loan application software can help minimize errors and omissions.
Small Business Funding Facts: Conclusion
Each of these funding facts carries important lessons for small business owners navigating the complex landscape of business financing. By understanding the deeper implications of these facts and adopting strategic approaches to address them, entrepreneurs can enhance their chances of securing the funding they need.
Effective cash flow management, credit monitoring, strategic planning, and attention to detail are key components of a successful financing strategy that can lead to sustained business growth and stability.
Small Business Funding Facts Summary
| Key Point | Summary |
|---|---|
| Positive Ending Balance | Having a specific amount in the bank at month's end is crucial for loan approval. |
| Personal Credit Score Affects Financing | Your personal credit score impacts your ability to secure business financing. |
| Personal Bankruptcy Doesn’t Mean Rejection | Personal bankruptcy doesn't always lead to business loan rejection, but it requires patience and credit score repair. |
| Building Financial History Starts Small | Starting with microloans is advised by experts like Yumi Clark to build a financial history that proves worthiness for bigger loans. |
| Hesitation Creates Doubt | Hesitation after receiving the contract can create doubt in the lender's mind and potentially cost you the funding. |
| A PO Box Can Sink a Deal | Using a PO Box as your business address can be a deal-breaker as lenders prefer a physical address as a sign of stability. |
| Incomplete Applications Raise Red Flags | Incomplete applications indicate carelessness, delay processing, trigger additional scrutiny, impact your credit score, and reduce your chances of loan approval. |
Online Banking Photo via Shutterstock
