The new business financing landscape
Imagine you’re in a moving car trying to hit a target 30 yards away with a BB-gun. It seems impossible and this is how many small businesses have felt when accessing financing. Business owners know getting money for their business is radically different than financing a home mortgage or a car. While online tools have helped simplify the process in some ways, new lenders and new types of loans can make everything even more confusing.
The recession and COVID-19 has essentially moved that figurative target back another 30 yards and sped up the car. It’s only become more difficult to get what you need and feel good about it. However, the secret to success is the same as it always has been — a clear understanding of your business’s data and how lenders will see you.
The time is now to invest your most valuable asset — your time — into understanding the business data that is going to matter to lenders.
What options are really out there?
Leading up to the crisis, there was an increasing variety of loan and financing options being developed to meet the needs of small businesses. Some of the lowest priced options in the industry — term loans over three, five, or ten years — are just simply not being underwritten by lenders (bank or non-bank) right now. What that means is that you’ll need to find other options to fund your business.
Secured loans are simply lower risk for lenders right now, making them more readily available for your business. Equipment financing, invoice factoring, commercial mortgages, and other types of secured financing for businesses can be good options, depending on your business, industry, and capital needs.
What you can control to help you access capital
Whether you were impacted or not by the COVID-19 crisis, if you can’t show a lender how your business is doing with real business data, you will struggle to get the working capital you need. Notice I stressed “real.” The fastest thing that kills a business loan application is a borrower who thinks they’re a great fit for a loan, but doesn’t understand their business’s real data. Remember that bullseye you were trying to hit with a BB-gun from 30 yards out in a moving car? If you don’t know how you are going to be judged by your business’s data, it’s like trying to hit that target blindfolded.
Here are the three pieces of data about your business that matter now and will help you get the financing needed whenever that time comes.
1. Your business checking account and bank statements
Nothing will make a lender more confident in you as a borrower right now than seeing your business’s most recent bank statements, since it shows how you’ve adjusted your business to the new economy. In a 2018 survey, 70 percent of those without a business checking account were turned down for a business loan in the last two years. If you’ve been running your business from your personal checking account, run, don’t walk to get a business account.
2. Your personal credit
This is especially important for smaller and new businesses, it was important before, and it remains important today. Personal credit scores give lenders a good look at how you have been faring through COVID-19 personally. If you think your business is big enough to not encounter a personal credit check of some sort in the process, keep in mind the latest Federal Reserve data shows 88 percent of employer firms rely on an owner’s personal credit score to obtain financing. That’s not going away with COVID-19.
3. Your business credit
Some people don’t even realize that their business has its own credit score, based largely upon whether or not your business pays its bills on time. That score is crucial for many lending products and establishing a solid one takes net-terms relationships with vendors and suppliers who report to the bureaus and established business credit card accounts. A good score doesn’t happen overnight.
If you’re worried about your ability to get financing right now, you need to start working on the three fundamentals above. Strong personal credit isn’t a snap, building tradelines takes time, and good bookkeeping can’t be sorted out in a day — the time to get lender-ready is right now. Remember that moving car and the target you’re trying to hit? If you do a little work now, as more and more lenders come back, you’ll have removed that blindfold, slowed the car down, and upgraded to a gun with a bit more firepower.