Funding Your Business: Building Credit and More
There are many reasons a business may find themselves strapped for cash. A new business might not have the established business credit necessary to begin. An established business could fall behind due to delayed payments for services rendered or unexpected expenditures. Sometimes a business simply needs money to expand.
If you have great personal or business credit, then it is relatively easy to find the funding you need. But, if your credit is less than stellar, you may have issues securing capital. Fortunately, there are now more options than ever for entrepreneurs to fund their new businesses.
Why does a business credit score matter?
There are two types of credit scores -- personal and business. All three of the major credit bureaus calculate your score in basically the same way, on a scale from 300-850, with 750 being a good score. Business credit scores are a little more like the wild west of the credit industry. There are many companies offering analysis on business credit, and they all have different methods of calculation.
Understanding how these scores work, and how they are different, are important for several reasons. A business owner using their personal credit line is responsible for the entirety of the debt load they create. By using business credit, it is possible to mitigate personal financial risk. Failing to build business credit also limits access to greater funding options.
Building business credit.
One of the most important things a new company can do is build their business credit. The process for building business and personal credit are similar, but there are some important differences. The first step is applying for a business credit card or line of credit. It’s important to do this with a business tax ID number rather than a social security number. If you don’t already have one, fill out IRS Form SS-4 to establish an Employer Identification Number (EIN), which is also used as the business tax ID. Use it when opening any bank or credit accounts. You’ll need one of these anyway if you plan on hiring employees, or paying enough freelancers to issue 1099s.
This establishes the business as a separate credit entity and prevents personal and business finances from becoming muddled. When applying for business credit, make sure the lender reports to the various business credit bureaus. Paying on time, and managing the debt load responsibly, won’t be beneficial if no one is aware of your efforts.
It’s a good idea to apply for a small amount of credit shortly after establishing your business, so you can work on building your business credit history before you find yourself needing a larger sum of money. Turn to a store-based credit line, like the ones Home Depot and OfficeMax offer, so you can start reporting something to the business credit bureaus before you would otherwise qualify for a credit-based loan.
Establish a profile with Dun & Bradstreet, a prominent business data and credit reporting agency. You may already have one, but if you don’t, it could be worth the fee to set one up. After establishing your profile there, add credit references, such as suppliers you’ve worked with, to improve your business credit profile.
Finding money with bad credit.
It can take some time to establish good business credit -- time you may not have. The good news is there are far more alternative funding options for business owners now than in the past.
A Merchant Cash Advance is one of the quickest ways to receive a cash influx for your business. Businesses can usually receive the money they need within 72 hours. The advance is a lump-sum given in exchange for a percentage of future debit and credit card sales. You pay the loan back daily based on sales, with the full amount to be paid off in less than a year.
Asset Based Loans are good for businesses who have a large number of assets but not enough cash on hand. The assets must be nonperishable and can typically be leveraged for 70 percent of their appraised value. If a company defaults on the loan, the inventory becomes the lender’s property. This type of loan relies on assets rather than credit.
Accounts Receivable Financing is ideal for a service-based business that has performed their service and has invoices outstanding. The lender gives the business between 70 and 90 percent of the amount due, and clients pay invoices directly to the lender. Depending on the terms of the advance, the lender then forwards the difference once they receive payment.
The newest alternative for funding your new business, or to grow an existing business, is crowdfunding. Most people have heard of Kickstarter and Indigogo, but there are actually many crowdfunding options for businesses. The keys to crowdfunding success lie in developing a solid and engaging pitch and having a strong fan base to help with promotion.
Film a promotional video of the highest quality production possible using a spokesperson who is excited about the campaign and personable. Once it’s in place, use every friend, relative and customer at your disposal to get the word out. The more people who are aware of the campaign, the better the chances it will receive the necessary funding.
Starting a new business, overcoming financial hurdles during a slow period, and finding access to funds for expansion may all seem like daunting tasks for businesses with insufficient credit. While it is a challenge, there are more opportunities than ever to make the needed funding a reality. Explore some of the newer funding options and combine strategies when possible to enhance your financing opportunities.