5 Things You Need to Know Before You Look For Small Business Funding
- What’s your personal credit score?
- Are you ready--and able--to put up collateral for your loan?
- Do the people who interact with your business on social media love it?
- How much, and what types, of documentation you’ll need to apply for the loan?
- How will you pay back the funding you receive?
Personal Credit Score
Your personal credit score is a key factor in determining whether a bank or alternative funder will consider your application for capital, and what you’ll pay in interest on the funds you receive. You must know your personal credit score before you apply, and have a sense of whether that number is good or bad for your prospects. Remember that, under federal law, you can get a copy of your personal credit report for free every year. Contact one of the three approved credit reporting bureaus (Experian, Transunion or Equifax) or use a service like Creditera to get both personal and business scores. Look the reports over for errors and following the service’s correction policy if you spot any.
Funding falls into two broad categories, secured and unsecured. For a secured loan, you will be asked to put up collateral, an asset that will become the property of your funder if you fail to repay your funding. Pledging collateral can help you get a lower interest rate than you’d get for a loan that is not secured by collateral. On the minus side, it may make you nervous to put up your equipment, or even your home to get that lower rate. In unsecured funding, a business owner no longer needs to risk her home to grow her business. Bank loans typically require collateral, while many forms of alternative funding need not be secured by collateral.
Your Social Media Presence
Do you have true fans on your social media sites? Or are people coming to your Facebook page to vent about your shortcomings? Are they using your Twitter handle to tell the world how good your business is, or how you failed at customer service? If it seems strange to pay attention to your social media status when you are applying for funding, you should know that many of the underwriters who will be considering your request will be checking social media to see whether doing business with you will be a bad risk. Like credit and collateral, character is one of the five traditional “Cs” of lending. Funders like to see businesses that are interacting with their customers and thanking them for being customers. If you have an unfavorable comment, see if you can resolve it offline and then let your fans know that you were able to iron out the misunderstanding.
Whether you seek traditional or alternative funding, you will be required to provide a lot of information on your business. An established business will need to show at least three months of banking statements, while a newer business or a company whose business rises and falls at different times of the year could be required to show a full 12 months of statements. Where to get the documents you need? If the bank you use for your business’ regular deposits has an online banking platform, you should be able to find everything you need there. Register now to use the site and practice downloading the statements you need. If your bank doesn’t yet offer online banking, take your paper statements to a scanner and save them as PDF files. Depending on the amount of documentation you need, you may want to save these files to a so-called “cloud” service so that you can access them even if you’re not close to your computer or filing cabinets.
Paying Back Your Loan
And finally, before you seek funding you must think about how you are going to repay the money you receive. Do your income statements give you confidence that you will have enough money coming in to pay back principal and interest? Can you show a funder that, if you borrow for a new piece of equipment, you’ll be able to do more business and generate the cash to repay the loan? You also need to learn how your funder will require repayment. A traditional bank loan is typically paid back in a fixed amount every month, which can cause difficulties for a seasonal business. Many alternative funders will instead take a percentage of the business you do each day: More of your loan is paid back on days when your business is strong and less on days when your earnings dip.
The better prepared you are, the better the chances that you’ll get the funding you need, and it will grow your business as intended.
Stephen Sheinbaum is founder of the online alternative finance marketplace Bizfi. Mr. Sheinbaum has been a leader in alternative finance since 2005. His first company, Merchant Cash and Capital, grew into a family of three companies and proprietary technology that has made funding faster and easier for small business in a wide range of industries all over the United States. Since inception, the Bizfi family of companies has originated over $1.1 billion in funding to more than 21,500 individual business owners.
Mr. Sheinbaum has authored several articles that have appeared in a variety of national publications, he has spoken on numerous industry panels, and he was most recently featured on CNBC and Bloomberg where he discussed the current state of lending to small businesses.