Funding & Lending to Grow Your Business
Today’s funding and lending landscape continues to change as technology evolves and data becomes more available to the general public. As a result, small businesses have far greater access to capital than ever before. Numerous channels exist to obtain funding – from traditional loans to peer-to-peer lending – which means there is an appropriate method for your business to access capital.
Defining Funding & Lending
Applying for a loan or creating a funding campaign is not nearly as simple as it sounds – preparation is essential, execution can be complicated, and success is not guaranteed. To give yourself the best opportunity to obtain capital, you must start with the basics. Though elementary, understanding the difference between funding and lending can help provide clarity:
- Funding – the process by which a firm fills a need for cash by using internal or external reserves
- Lending – the process by which an individual or institution makes funds available to others; funds are paid back with interest
It also is important to understand why businesses seek funding. Below is a list of financial needs that are common among small businesses:
Expanding your current business
To encourage “green” practices
To implement training programs
Starting a new business
Exporting goods & services
To recover from a natural disaster
Different Types of Funding for Your Business
Once you have reaffirmed funding is appropriate for your business, you must choose what type of funding is best for your venture.
In addition to providing clarity, business credit can impact or influence the following:
It is strongly recommended that business credit and personal credit be two different things. Establishing your business as a separate entity can be crucial for protecting your personal credit from any business issues and for building your business’s credibility. Though a loan officer may still consider personal credit in the process of granting a loan, the importance of business credit cannot be overstated.
There are a couple of ways that having strong business credit can help small businesses seeking access to capital. First, it can build a business’s confidence. The study demonstrates that businesses that know they have a strong credit score feel more confident when trying to qualify for loans, whereas businesses who have poor business credit or don’t understand what business credit is are less likely to apply for loans even when they need them.
Most importantly, businesses with strong business credit are more likely to receive loans once they apply. Often times, being denied for a loan is the catalyst for business owners to start seeking solutions to build and monitor their business credit file.
To put it simply, lenders want to know they are going to get their money back on time. A business owner’s character and professionalism certainly can’t hurt, but a business’s credit profile—which details things like payment history and likelihood that a business will fail in the next 12 months—can go a lot farther to help demonstrate business stability.
Beyond just demonstrating the importance of business credit, the study elaborated on the importance of having a long-standing relationship with a lender. Businesses who have relationships with lenders are more likely feel encouraged to apply for loans in the first place—and get them. Bryan Moeller with Wells Fargo explains in the video below how beneficial a lender-lendee relationship can be.
Want to learn more about how funding and lending can affect your business credit? Check out our ultimate guide to business credit.
Key Factors in Assessing Creditworthiness
It can be important for business owners to understand the specific factors potential lenders may consider when evaluating a company’s creditworthiness. Here are some of the key factors:
Years in Business
Several D&B® scores and ratings consider the age of a business when assigning risk values, and lenders often find this information helpful. New businesses may not have had time to build a financial cushion for themselves in the event of economic headwinds. A startup is unlikely to have established payment experiences with other creditors. Finally, lenders may see funding a first-time business owner’s efforts as an exceedingly risky endeavor.
Past payment experiences are known as trade references*, and are simply reports of transactions with lenders or suppliers. Companies that have a history of repaying their debts on time are thought to represent less risk to future lenders. While there are no guarantees that this responsible financial behavior will continue, a collection of positive payment experiences may impact a business’s PAYDEX® Score. This, in turn, can make a company more creditworthy in the eyes of lenders.
A business needs at least four trade references on file with D&B before a PAYDEX Score can be determined. A maximum of 875 trade references can be considered during this process, though no more than 80 are reported in a business credit report.
Company Financial Statements
Since credibility can include how likely a business is to repay its debts, it should come as no surprise that a company’s financial statements can be considered when determining its credit scores and ratings. A business owner can supply financial documents to D&B, which may allow D&B to help deliver a more comprehensive evaluation of the company’s credibility. These documents can be submitted for free through D&B’s Company Update.
Bankruptcies, Tax Liens & Other Public Records
Much like trade references, public records can provide insights into the past behavior of a business. D&B collects public information in all 50 states and the District of Columbia, and may display these details in its business credit reports.
D&B attempts to compile a comprehensive database including bankruptcies, tax liens, lawsuits, and legal judgments. Public records that show financial stress on a company may make it less palatable to lenders.
The business information gathered by D&B is not just used to help determine scores and ratings for individual companies. The aggregate data can reveal industry trends and norms, which can then be used as a benchmark to determine the credibility of firms within that industry. Not all industries are created equal; earnings and debt loads may vary. Drawing upon its data resources allows D&B to put a business’s credibility in context.
What Sole Proprietors Need to Know
It’s not unusual for business owners to organize their companies as sole proprietorships. In this setup, the owner and business are seen as one entity. Unfortunately, this can complicate the company’s efforts to build business credit. Sole proprietorships cannot establish business credit files of their own, but are instead tied to the personal credit of the owner. That means lenders may pull your personal credit report when judging the credibility of your business. Past financial mistakes can impact your business’s ability to get financing. Debts acquired in the course of doing business may be recorded on your personal credit file. Business owners should consult an attorney or financial expert before deciding upon a structure for their company.
A business’s credibility is determined by a variety of factors. Some can be influenced by business owners, such as payment behaviors. Others are largely out of their hands, like the amount of years they’ve been in business. However, the more a business owner understands what lenders can look for in a credible company, the better prepared they can be to manage their business credit file.
Implications for Small Business Owners
So what does this mean for you as a business owner? Though business credit can be crucial in securing loans and lower interest rates and premiums, it doesn’t mean your business is doomed if you have poor business credit. There are many ways your business can gain access to capital, including: