There’s no doubt about it; getting traditional business financing is hard. More than half of business owners who apply for credit receive none. You may have experienced this yourself.
And like other business owners, you may have turned to alternative lenders to get your hands on capital. These folks serve an important purpose, but they tend to charge higher interest rates than traditional lenders. Paying them back can be a serious drag on cash flow.
It doesn’t have to be this way. You can qualify for better financing, with smaller interest payments, if you take steps to prepare before you apply.
1. Work with a mentor
According to a Bank of America survey, 69% of business owners who meet with their banker at lease three times per year expect an increase in revenue. Building a strong relationship with a business mentor matters.
When researching bankers, you’ll want to find one who’s worked with businesses similar to yours. That way, they’re more likely to understand your plan and can offer advice based on other businesses they’ve worked with. An experienced banker can also help you navigate the different financing products available. As their customer, they’ll have a vested interest in seeing you succeed. If you do well, they do well.
2. Get your credit in shape
This means both your personal and business credit. As soon as you incorporate, credit bureaus start building a profile just on your business. Lenders judge you on these business reports, as well as your personal scores.
In fact, low personal and business credit scores are the primary reason business owners don’t qualify for financing.
For example, to qualify for the SBA’s most popular loan program (and the favorable interest rates that come with it), your FICO small business credit score (FICO SBSS) must be up to snuff. The SBA uses it to pre-screen all of their 7(a) loan applications. Currently, the minimum needed is 140.
You should approach improving your personal and business credit with same passion it took to start your business. No other factor has a bigger impact on your ability to get favorable financing. Even if your cash flow projections, financial statements and business plan are on-point, a low credit score can sink you before the process even starts.
3. Start small
Before you run into the bank looking for a $500,000 credit line, you’ll want to start with smaller financing products. Managing these well (paying on time) will build your credibility and make lenders more willing to bet on you for larger loans and credit lines.
Initially, business credit cards and trade credit lines are the easiest forms of financing to get. For trade credit, use the vendors and suppliers you work with often. This could be companies like Staples, Office Depot, Home Depot, Costco, etc. Most are willing to extend a little credit to any business.
A common misperception is that applying for credit only hurts your scores. While it’s true that having too many credit inquiries within a short window can temporarily ding your scores, showing positive payment history and diverse types of credit accounts will dramatically improve your business credit scores over time.
When trying to grow a small business, it can feel like the scales are tilted against you. But, if you’ve made it this far, you’re a winner. You’re self-reliant. There’s no reason you can’t get the financing your need to make your dream a reality. Preparation is the mother of success. The time to start is now.