This year small businesses have been having a hard time securing funding like never before. With the end of the SBA PPP and EIDL programs, which were temporary to get businesses through the pandemic, and the increase in interest rates making it more costly to borrow money, owners of small businesses have been faced with all kinds of challenges to get the right funding fast.
As a business owner, there are many factors that you have to stay on top of to get your business in line for funding. Any small mistake or misstep can disqualify you for much needed funding to keep your doors open or to help you to expand.
Here are the most common factors that prevent small businesses from getting funding...
1. Entity not set up correctly - This is one of the most common mistakes the lenders see in applicants looking for funding. Most banks frown upon lending to sole proprietors and they prefer that a business is incorporated as an LLC, S-Corp, or C-Corp. They also want the business to have a tax ID number.
It is also helpful to have the business registered with Dun and Bradstreet which you can do through NAV.com, and report business trade activities through Experian Business Credit. This will increase your chances for funding by showing a history of business credit.
2. Unsteady cashflow - With the economy heading towards a recession and we never know if we are out of the woods with the pandemic, lenders are looking to see how businesses were able to manage their incomes during the past year. Lenders are requiring 6-12 months' worth of business bank statements to evaluate the cash flow to see if it is steady or are there any breaks in income for any reason.
Make sure that you report all of your income, make sure it is consistent, and be prepared to explain any unforeseen dips in cash flow.
3. Low guarantor FICO score - There are a lot of myths going around the internet that you can secure thousands of dollars in business financing without producing your personal credit. That is a lie. All lenders still want to see the personal credit of the guarantor of the business for risk purposes. Even though most business loan and lines of credit do not show up on the business owner's credit, lenders still have minimum credit requirements to protect their interest.
Most business funding programs require a minimum FICO score of 660 to be considered for a loan. They will look to see if the business owner has any liens, judgments, or bankruptcies in which any of these, especially if recent, can disqualify them for a loan.
It is important to check your credit before applying for a business loan to see where your credit utilization is at, if you already have too many inquiries, and if you have the minimum score requirements. There are some bridge loan programs that can go as low as 550 credit score, but the terms are shorter, and the rates are higher because of the risks.
4. Unorganized paperwork - Running a business is very time consuming and a small business owner has to wear many hats like marketing, staffing, and even bookkeeping. Many loans are declined for lack of preparation of the business financials and in many cases, it could have been avoidable.
Before submitting a file for a loan, you have to make sure you incorporation status is current and up to date with the state you operate in, business licenses are current and the appropriate fees are paid, business income taxes are filed and up to date, and you have all of your business bank statements in order for the past three years.
Once again, the lenders are protecting their interest against any defaults and will require all these documents (plus maybe even your kid's blood type LOL) before they can fund your loan.
5. Industry deemed as risky by lenders - Coming out of a once in a lifetime event with the pandemic during 2020 to 2021, then get hit with a war in Ukraine, skyrocketing gas prices and interest rates, and a recession backed with inflation in 2022, some small businesses were impacted more than others. Lenders started flagging some businesses as a high risk for default when it came to evaluating a loan. For example, during 2021 restaurants were impacted the most during the pandemic because they were not able to seat and serve more customers whenever a new variant of COVID came out and cities had to go on lockdown. Lenders did not look at those applicants favorable at that time, but the industry rebounded in 2022.
In 2022, truck transportation is taking a hit in the funding department because once the price of gas went up, it ate into the profitability of the trucking business. Where three years ago it was easy getting trucking companies funded, it is a challenge now. Hopefully this will be temporary like the restaurant industry once gas prices start going down.
The business finance industry is always changing with the times like the weather. Be organized and stay informed so that your business does not miss funding for an avoidable reason.
Carl Agard is the Publisher and Editor in Chief of Boss XL Magazine and the Author of the Book "Financially Surviving COVID19 (Deleting Derogatory Credit)"
For more tips and information, follow at IG @carlagard_themoneyexpert
