Compound Profit Blog

All businesses have the same quandary when it comes to getting a loan. They have to prove their business fundability. However, small business owners face a steeper hurdle due to the fact that they usually do not have as much capital, as many assets or the connections that big corporations have.

Owners of all businesses, regardless of size, can get a great deal of help learning about business funding at www.businessfundability.com. In the meantime, there are a few things small business owners can do right now to get started creating the kind of business credit needed to prove their business fundability.

Create an Identity

This is usually the first step in starting a business, but many new business owners overlook it. It’s not too late. Get started creating your business’ individual identity now. 

The first step is a visit to the IRS. Don’t run away. You don’t have to go there in person, just go to their website and get your EIN number. The EIN is an “Employer Identification Number” and serves your business the way your social security number does you personally. It is tax identification, but also establishes your business as an entity.

The next step is to register with Dunn & Bradstreet. This organization has much to offer a business of any size. Along with being one of the biggest business credit reporting agencies, they also offer help for businesses in establishing credit, and a Dunn & Bradstreet number can be used to identify it on credit cards too.

Finally, get listed in your local 411 directory. Once you have established your business’ personality you are just beginning on the road to credibility.

Establish Vendor Relationships

Do you walk into your local office supply store, pick up your items and pay at the register before just walking out? Stop it! Talk to the management. Introduce yourself and ask for a vendor account. A vendor account is often a small business’ first credit. Vendor accounts differ in two important ways from major credit cards. First, a vendor account has a short term credit period. You can’t continue to carry a debt. You must pay the entire amount due within a certain period of time, usually either 30, 60 or 90 days. The second difference is you can’t use a vendor account anywhere except that store, or chain of stores.

Don’t just open one or two vendor accounts. Find several businesses you like working with and need products or services from and establish an account. Banks like to see at least 5 vendor accounts when determining business fundability. Once you have these accounts, keep them in good standing for several billing periods and you are well on your way to having the credibility you need to get a small business loan.

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The SBA, also known as the Small Business Association, provides a special service for the small entrepreneur. While they do not actually provide loans, they back your loans with banks to get you the money you need for certain purposes. There are many types of SBA loan:

• 7a loans that are special purpose loans for certain types of businesses such as the export loan program that helps small export businesses get the money to start or develop an existing business, rural business loans that give loans to small businesses in rural areas and others.

• Micro loans give short term money when needed for special projects or to bridge a financial gap for things like payroll or purchases.

• 504 loan program gives existing businesses that want to create a new subsidiary or branch a way to develop that new idea or product.

Preparing Your SBA Application

As with any bank, you will need to fill out the standard loan application with the Small Business Association to qualify for one of their loan programs. Along with that application you will need certain supporting materials to prove your loan worthiness.

The SBA is of great benefit to small businesses, but they are actually more strict than your local bank or a national financial institution. The SBA will require all of the same financial information a bank would such as income tax returns, proof of a business license or certificate, and financial information on your existing business if you are not a startup.

You’ll also have to provide the SBA with a loan application history, showing all places you have applied for a loan during the business life of your company. Each principal person in the company will also need to provide a resume to show they are capable of the job they are performing within your company. 

A good business plan is a must when applying for any business loan, including one from the Small Business Association.

Small Business Association Lines of Credit

You can also get a line of credit from the SBA. This lets you have access to the loaned amount when you need it, but not pay any interest on money you haven’t used yet. You only pay interest on the part of the money you have used at any given time.

Once you have provided all of the information needed for your loan or line of credit application and you are approved, that still does not get you the money. That just gives you the power to walk into a bank and say you want a loan for the approved amount and say you have the SBA’s backing.

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Getting a loan can be scary for new business owners. However, getting a small business loan is usually imperative when beginning any start up. If your new business idea requires a lot of equipment, office supplies and materials, you don’t have to foot the bill yourself. You just have to apply for a loan. 

Knowing how to make the most of your loan applications can improve your chances of success. Starting small is a good idea. That doesn’t mean small business plans. It means finding smaller, private banks. Small banks are much more flexible. At a local bank you also have a better chance of developing a relationship with your lender.

Another great place to start is the Small Business Association. They have many programs to help new businesses get started. Regardless of where you start, there are a couple of things that will help you get started on the right foot.

Make a Plan

Even a small business needs a plan. A business plan is more than just an idea; it is a blueprint of how to make the idea work. While having a business plan is important for business success, it is just as important as an aid to getting small business loans.

The bottom line is banks and other lenders want their money back. They also expect to make a few dollars extra in the process. That’s their business. When you ask for money, they are likely to want to know everything about your business. They want to know how it will work, what it does and how you expect to get paid for your work.

A business plan goes into everything in great detail, and will be an asset to your loan application. With a business plan, there are no questions left unanswered, and a lender can determine if your plan is realistic, and if they have a good chance of a return on their investment.

Dealing with Rejection

Rejection is a part of the process. You may not get the first loan you apply for. When starting out, understand that the process of obtaining small business loans may take several tries. You can learn from your mistakes and build on the experience from each loan application if you have the right outlook.

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You have a great idea that you want to turn into a business.  Maybe you’ve been laid off or the company you worked for went out of business.  You have a specialty skill that is in great demand and have decided to go out on your own or with friends / co-workers.  But, you need some money to get started. 

One place to start is by doing an internet search for financing options in your city.  It’s also smart to check out your local Small Business Association, SCORE, micro-business and other organizations that offer education and assistance to new start-ups and growing businesses in your community.  This is generally a good first step, before you go for the funding.  These agencies can help you get your business plan together, help you with organizing documentation required by some lending agencies, and prepare you for the financing requirements.

Many lenders want to see what your personal investment is going to be before they will give you any money.  So, what are the most used financing methods?  Many people use their personal credit cards, but it is important to use these wisely.  Pick your best offers if using new credit cards, try not to go over 50% of the total credit available.  Personal loans are also possible if you have a good credit history; added to current employment income, you can increase the size of the loan and obtain better rates. 

Home equity loans are a possibility if you have equity in some property, and have the advantage of lower payments and stretching the loan over several years.  I don’t recommend a home equity line of credit unless you keep the amount used under 50% of the available balance, as it can be treated as revolving credit when calculating your debt ratios. 

There are Small Business Association loans available that reduce the risk of the banks; these do require that you have your business plan, and all your paperwork organized.  There are also a few other lending options for new small businesses from alternative financing companies.  One option is business credit / loans based on your personal credit, as we’ve discussed previously.  Some not for profit companies also have grants and loans available. 

Another option is using part of your 401K / rollover IRA money to start or add a cash infusion into your business.  It is wise to explore all your options before committing to any of them.  Compound Profit offers many alternative financing options. Contact us - we can help.

This article was submitted by Christy Giroux of Compound Profit of Arizona.  She can be reached at 877-386-3716, ext. 249. 

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