Being an entrepreneur is a process of trial and error. Most business owners will tell you (if they are honest) that they made some mistakes their first time trying to start a business. Unfortunately, banks and lenders are pretty unforgiving, even with the small stuff.
With that in mind, I had a conversation with a local business banking specialist and we came up with a list of business basics that make a big difference.
1. Your Business Name
If you are just choosing a name, try to choose as basic and loose of a name that you can that doesn’t peg you into one industry. There are a lot of industries that fall on “restricted” lists.
There are many “high risk” industries lenders don’t prefer. The list of high risk industries is different for each lender and funding type. Some lenders have been burned by one type of industry and “blacklist” it, while other lenders offering similar products are okay with that industry. There are, however, some industries that are almost ALWAYS seen as high risk no matter what lender you apply through.
“Vices” are almost always seen as high risk such as gambling. Other industries such as “financial services” are restricted with many lending sources, but not all.
Financial services can include credit repair, lenders, accountants, insurance agents, mortgage brokers, realtors, and anyone else dealing with any type of financial transaction. Always ask upfront if the lender views your industry as “high risk”.
As for names, general consulting type names work best as nobody will deny you then. Any other industry specific name very well might restrict your ability to get money with some lending sources and credit issuers.
2. You need a BUSINESS phone
Don’t use a personal home phone or cell phone. YES, lenders WILL know!!! So don’t even try applying for money without a real business phone. Voice Over IP (VOIP) numbers are okay.
You should consider having a toll-free number, unless you only deal with local business such as a restaurant. You should also have a fax number, and all your numbers MUST be listed with 411.
3. Take inventory
Being a home owner increases your chances of being approved. It shows a greater level of maturity and responsibility. Plus, it shows you can manage a higher monthly payment. And your home might even be used as collateral for some financing such as SBA loans.
Lenders love assets because they love collateral, so when you are asked on an application about the assets you have, what the lender is really looking for is what you can use as collateral for the debt.
The more collateral you have, the better chances you have of being approved with many types of financing. SBA loans REQUIRE the lender to take ALL assets you have in your business as collateral and if still not enough they will take personal assets such as your home.
Some lenders, such as advance lenders, don’t need collateral. It still helps them feel more secure in lending you money if you do have assets to show. Many things can work as collateral such as 401k and stocks, real estate, inventory and equipment, purchase orders and receivables, and other items that are easy for a lender to sell
and get their money back in case of default.
4. Leave your money in the bank
If you ever need business funding, one of the first things a lender is going to check is the average daily balance in your business bank account. If you are regularly dipping into your business checking account to pay your bills then your account will have a low average balance.
It makes sense therefore to utilize credit lines, such as vendor accounts or business credit cards to pay your day to day expenses, leaving as much cash in your account as possible for as long as possible, and paying off those accounts on a monthly cycle. This will inflate your average daily balance.
5. Get a business bank account early
You need a proper business bank account for so many reasons. It has tax implications, will help you with bookkeeping, and even asset protection. From a "lend-ability" perspective, it helps to have your account open as long as possible. Many lenders will consider the day you open your account as the start date of your business, regardless of what it says on your articles of incorporation.
The longer you’re in business the better your chances of getting approved for almost all types of financing. This is because EXTENSIVE statistics on this show that the majority of businesses fail in early years, three years or less of being open.
The longer a business is open the more their chances of failing decline. So longer standing businesses have a much less risk of going out of business than shorter standing ones do.
Being open less than one year makes it tough to get financing. You can usually get unsecured personal and business cards with no issues, but advances are tougher, and loans are nearly impossible to secure.
Some business credit vendors, stores, and cash credit sources also might not approve you if you have been open one year or less. Three years or more is what most sources prefer and this is part of the reason that SBA loans require 2-3 years of financials.
Having good stable revenue can be one of the main reasons you get approved for some funding products, such as merchant or revenue advances. Just in having consistent revenue alone can get you approved. But almost all sources do require that you have revenues coming in for approval.
Some sources such as personal and business cards won’t require verification. Other sources such as lenders who offer advances will verify your cash flow with your bank statements.
Most lenders issuing loans and credit lines will require tax returns on top of P&L statements and bank statements to verify your income. Your tax returns must show good profits, the amount you show will determine the amount of money you are approved for.
You must show increasing profits from year-to-year, not declining profits. Declining profits are a sign of trouble, and most lenders will RUN away from any deal where the applicant has revenues or profits declining from year-to year.
6. Don’t close unused accounts
Your credit limits and credit utilization can affect your ability to get credit. If you close, say, an unused business line of credit with a $5,000 limit, you may inadvertently hurt your credit by making it look as if you’re using up more credit and therefore in worse financial shape!
...I hope these basic steps can make a difference in the way you do business. If you're already doing them, then there is a good chance you have an excellent business credit rating. If that's the case, then I will give you one more bonus tip:
Unlike personal credit, your business credit is public information, so you can check your score and everything on your business credit report for free. In fact, anyone can. Your clients, partners, your competitors, and definitely a lender. They don't need your permission.
So, check and monitor your business credit reports. Make sure vendor credit accounts are reporting and reporting accurately. If you encounter any issues or inaccuracies, take steps to correct them right away.
Here's to your success!