Small Business

The 4 Things That Help Small Businesses Get More Funding

As every small business owner knows, having capital on hand is the lifeblood of business success. You simply can’t balance covering day-to-day operations with any plans for growth if you don’t have the cash. 

And it’s not always so simple as reinvesting your profits or revenue. If you tie up your money in a growth project, and then sales take a dive, you’ll be on the hook for bills and expenses that you can’t cover. Cash flow issues like that are a common reason why small businesses fail. 

After the personal savings and loans from friends and family run out, where can you turn for more financing? Many look to small business lenders (including banks, nonprofit lenders, and online lenders) to find affordable—and sometimes more importantly, quick—funding. 

If you’re a small business owner preparing to apply for a business loan, you’ll want to understand what criteria lenders require for approval. In other words, how can you make your business as attractive as possible to lenders so they’ll be more likely to not only approve you, but approve you for the amount you need? 

Based on findings from Fundera’s recent State of Small Business Lending Report, here are four things business owners should focus on to maximize funding: 

Revenue Is More Important Than Profit For Alternative Lenders

Most small businesses won’t be able to turn to a bank for a loan, as banks prefer to work with large, well-established businesses with bigger financing needs. And if you’re in the market for a quick form of financing, there may be no better option than the class of online lenders that emerged in the wake of the Great Recession. 

The primary thing these lenders care about isn’t profitability, but revenue. (Revenue is your total income generated by your business, while profitability is what’s left over from your income after you pay all your expenses and debts.) All of the businesses in the top-10 of the “most likely to receive funding” list had above-average revenue; they did not all have above-average profit. 

In fact, one of the most profitable industries that Fundera reviewed (Religious Evangelism and Related Services) was second-to-last in terms of funding success. 

Of course, if your business is highly profitable, that’s great. But if at this stage you are primarily concerned with reinvesting your profits back into your business, this strike won’t count against you to an online lender. 

Prior to applying for a loan, explore responsible ways to increase revenue. The main tactics to do so lie in increasing four metrics: prices, number of customers, average transaction size, and transaction frequency. 

But For Longer-Term Loans, Show More Profit

While profit isn’t important for obtaining a short-term loan, it is very important if you want to obtain a long-term loan. 

Lenders that disperse long-term loans, such as SBA-approved nonprofit lenders, want to see businesses that are profitable and can sustain a repayment term of many years. Any multi-year loan will likely require that the business is profitable. 

According to the report, almost every business that received the largest sums of funding overall in 2019 had well-above-average profits. These businesses more often qualified for SBA loans, which are for much larger amounts of funding, on average, than short-term loans. 

If you’ve been reinvesting your profits in your business in order to grow, or to lower your end-of-year tax burden, it’s time to start demonstrating more profits on your tax returns. Talk to your business accountant about the best way to do so. 

Don’t Ignore Your Personal Credit Score

Some business owners don’t understand the relevance of their personal credit score when applying for business funding. On the surface, it seems like these two things are unrelated—if your business is strong, who cares if you’ve had some personal financial issues in the past. 

As it turns out: Lenders care. A review of your personal FICO score is practically universal by all lenders. Red flags in your personal history can sink your application, or limit your options to the least affordable offers. 

No surprise then that in this report, personal credit score is very highly correlated with success in receiving small business funding. 

Reviewing and flagging mistakes on your credit report, responsibly using a personal credit card, and having a responsible mix of credit products (such as a car loan, mortgage, and credit card) are all ways to boost your FICO score ahead of an application. 

Seek Funding For Major—Not Minor—Projects

By far the most common reason that small businesses sought funding last year was to cover working capital costs. That cash can cover a whole host of issues, from payroll gaps to buying inventory to paying the bills. 

That kind of funding need is typically much more immediate than the funding for paying for expansion or long-term growth initiatives. Therefore, those loans are typically more expensive, and for smaller dollar amounts overall. 

Want to make the most of taking on debt financing? Don’t seek a loan for working capital needs unless absolutely necessary. Consider alterations to your business model first—cutting costs or tweaking prices. Save loan applications for major projects that can withstand long underwriting periods and give you time to improve your business’s outlook. So when it is time to apply for a loan, approval is much more likely. 

The Bottom Line On Getting Small Business Funding

The truth is, the vast majority of small business owners won’t get the same kind of financing help that big businesses or venture-backed startups receive. As the owner of a small business, you’ll need to be much more savvy about your finances, your accounting, and your needs in order to obtain approval. 

Being aware of the best practices for getting a loan—not to mention the best reasons for pursuing one in the first place—is the first step toward getting approved more often and for bigger dollar amounts as your business grows.

Source

neallesh@yahoo.co.uk

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