Entrepreneurs Don't See Business Financing the Way Lenders Do and It's Costing Them Many small-business owners are stressed about cash flow because they don't understand how banks assess whether they're a good bet.
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Starting a business is no easy feat. Many entrepreneurs are experts in the products and services they offer, but running a company requires a wide range of duties. This can include topics well beyond their expertise, such as making key decisions about securing business financing.
To better understand how entrepreneurs feel about pursuing and using business credit, we at Wells Fargo conducted a national study of business owners. What did we learn? A few findings stood out from the rest. They reveal some closely held truths and also offer insight into how the financial-services industry can help entrepreneurs use credit responsibly.
Startups have more financial stress.
Nearly one-third of small-business owners running startups said they're highly concerned about having enough money to meet their business goals. Another one-third indicated their financial situation is a significant source of stress.
Managing finances can be one of the most challenging responsibilities for entrepreneurs. When used properly, business credit can provide the necessary capital to manage fluctuations in cash flow. That increases a business owner's ability to pursue opportunities to improve and grow the business. Entrepreneurs must understand their credit options so they can take advantage of financing structures that meet their needs and goals.
It's the banker's responsibility to make it as easy and clear as possible for business owners to decide which option is best -- and why. In general, credit cards are most appropriate for everyday business purchases such as supplies, office equipment or monthly vendor payments. In contrast, a business line of credit typically is used for several large purchases, spread out over time. A business loan is a good option if the company needs to access all the funds at once.
Small-business owners have a limited understanding of what it takes to secure approval.
Only half of small-business owners strongly agree it takes time to build a strong credit application. Two-thirds believe their personal finances should have equal weight in business-credit decisions.
Deciding if and when business financing is right for your business can be a tough call. Before approaching a lender, business owners need to understand some of the key factors that will be used to evaluate their credit application:
Credit History: How has the business owner managed previous credit?
Ability to Repay: Is the business profitable, and does it have positive cash flow?
Capital: Does the business owner have enough investment of personal capital in the business?
Collateral: Does the business owner have assets that can be used as collateral to secure a lender's investment?
- Business Experience: Does the business owner have extensive experience in the industry?
Business owners who better understand the factors used to determine creditworthiness can assure they're working to develop a strong credit profile.
Small-business owners want to receive support throughout the process.
A strong majority of business owners desire clear and easy-to-access information before they apply for credit. During the application process, they want payment terms to be clearly defined. Predictably, they're also eager for information on how to get approved and tips to maximize funding.
Financing a business without the right support and tools is a complex task. While some business owners are credit-ready, others need guidance on how to build a successful credit profile. The financial-services industry needs to educate business owners on what it takes to be approved for this funding. Only then will entrepreneurs be empowered to make the most of their credit options and realize the potential to grow their companies.
These are the very priorities behind Wells Fargo's Business Credit Center. Our website includes free educational resources to help business owners understand and navigate the three phases of building credit: pre-application, the application process and after the financing decision. The online tools can help provide greater clarity and improve business owners' ability to decide which credit options are right for them.
Small-business owners can benefit from consulting with bankers to determine the best solutions for their company. With the right tools and guidance, more entrepreneurs can become credit-ready and secure financing to help their businesses succeed.