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.

Traditional Funding

Traditional lending is just another term for bank loans. Bank loans are considered traditional because they existed long before things like crowdfunding and online lending, which you’ll learn more about below. After the 2009 recession, acquiring a bank loan became much more difficult, and many new kinds of alternative lending emerged. Even now, getting a bank loan can still be a difficult task. According to quarterly survey results taken by Pepperdine Graziadio School of Business and Management along with Dun & Bradstreet, small business owners across the nation have consistently been receiving bank loans less than half the time. There are a few reasons that could be contributing to a lack of bank loans, but two of the most common are business credit and lender relationships. Watch the video below to learn more about how having strong business credit and building a relationship with your lender may help you get a bank loan:

Traditional Loans: Can Your Business Get a Bank Loan in One Session?

Learn more about Traditional Funding on Access to Capital

Alternative Funding

Alternative lending includes various different types of funding, and is generally used as an alternative to a bank loan.

Alternative loans are in demand for one major reason—increasingly, company decision-makers cannot obtain a traditional bank loan. As larger financial institutions have slowed the lending spigots in the years following the Great Recession, many small businesses are labeled as lending risks.

Into the breach has stepped alternative lenders, who cater directly to small business owners and can consider often-overlooked (by banks, primarily) sources of collateral, like real estate, future revenues, or outstanding client invoices to secure the loan.

To provide a more appealing option to small businesses, alternative lenders are usually more flexible than larger financial institutions on loan repayments (many offer flexible schedules, for example) and often green light loan approvals much faster than banks, often getting business owners within 24-48 hours of the loan application. With speed, convenience and flexibility as selling points, alternative loans are among the fastest-growing financial tools for small businesses available today.

Learn more about alternative funding on Access to Capital.

Crowdfunding

Crowdfunding is the idea of using anyone you know to help fund your business through small investments. Often times these small investments will come with some perk, whether it is a piece of merchandise or some ownership in the company. In this section you’ll find videos, case studies, links and experts who can guide you to the resources that can help you decide if Crowdfunding is right for your business.

Gift Crowdfunding

This type of crowdfunding is usually what comes to mind when you hear the phrase. Gift crowdfunding was made popular by sites like Kickstarter, GoFundMe and Indiegogo. How it works is that when someone donates to your cause, you give them something in return, such as early access to your product, or some kind of two-for-one deal. They don’t receive any rights to your product or receive any ongoing compensation, like they may in equity crowdfunding.

Equity Crowdfunding

The second, lesser known type of crowdfunding is equity crowdfunding. Until recently, it was only possible for accredited investors to fund a business through equity crowdfunding, but as of May 16, 2016, anyone can become an investor. How it works is, opposed to gift crowdfunding, when someone gives money to your product or business, they receive equity in your company and become an investor. They will receive future returns on their investment based on the amount of equity they received. This type of crowdfunding can have more risks and responsibility, since investors are interested in the long-term success of the business, instead of just a one-time commitment and gift. Learn more about equity crowdfunding and if it may be right for your business.

Learn more about Crowdfunding on Access to Capital

Venture Capital

As a startup, many forms of funding are available, but generally a new business venture will opt to give up equity in the company in exchange for early stage financing. Often, this type of financing involves venture capital or angel funding. How it works is, you pitch your business idea to venture capitalists and try to sell them on your business. If you can show them that you have a unique business idea that will profit well over time, and that you yourself will be a good business owner, you may be able to get large amounts of funding in exchange for a percentage of equity in your business. You may have seen this process on the hit TV show Shark Tank, where companies, like Pork Barrel BBQ, can receive funding that helps them grow. Listen to these entrepreneurial strategies for success to get some more insights:

Learn more about Venture Capital and Startup Funding on Access to Capital

Critical Funding Questions

Regardless of the type of funding you are seeking, it is important to ask yourself these general questions:

  • Why are you seeking funding? What will the money be used for?
  • Have prepared a complete business plan?
  • Do you have projections of your financial statements?
  • How does the lender/platform make money? What are their incentives?
  • Are funding terms fair and transparent?

These questions, while broad, will help you focus on how to best obtain funding and how to best utilize it. Answering them can help clarify objectives and can help mitigate risk associated with funding and lending.

How Business Credit Affects Funding & Lending

study released by the Small Business Administration Office of Advocacy supports that the recent existence of business credit scoring has been largely beneficial to businesses, giving banks and other lenders a clearer picture of the financial standing of businesses they are considering lending to.

See more studies on small business lending:

         Nationally:                               New York:                           California:                            Texas:

NationGraphic_Q1_2016_v05-2-1    New_York_PCA_Q4_2015-small-173x300   CA_PCA-Q1_2016   TX_PCA-Q1_2016

In addition to providing clarity, business credit can impact or influence the following:

Personal Credit

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.

Confidence

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.

Credibility

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.

Relationships

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.

Payment History

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.

Industry Norms

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:

Photo Credit: WR36kevinannahspraguedoondevil; Twenty20