New businesses are one of the most challenging groups to finance. Angel investors and venture capitalists are usually only interested in companies that can scale quickly and generate a big payoff with an IPO (Initial Public Offering), purchase, or other similar exit—think Facebook or Twitter for example. That doesn’t usually apply to the wholesaler with a new product to take to market, a new mechanic we might have fix our car, or a new local restaurant getting great reviews on Yelp!.
Even though the bank around the corner may have rejected your loan application, there are still options. They just might not be where you’re looking. But before we talk about the options, lets look at why the bank probably turned you down.
Understand Why You Were Rejected
First, don’t let you banker get away with vague answers when he or she explains why you didn’t get approved for a loan. What was the real reason? Make sure they get specific; was it your credit score, the industry you’re in, or something else? You need to know if your application was doomed from the start so you can make adjustments for next time.
Bankers don’t like anything that looks risky. Even though your new business idea is tuned-in to your intended customer base, is priced right, and has every indication of being successful; if you have a few years in business, the bank is probably not going to approve your application. Sometimes it isn’t really you or your business; you just haven’t been around long enough.
You should know that roughly half of all the great ideas for starting a business don’t make it to a fifth birthday. So what a banker sees when he or she looks at you is basically a coin toss as to whether or not your business will even be around at the end of the five-year term loan you’re applying for.
That’s why bankers want to see four or five years in business before they talk to you. In the mean time, there are some options outlined below that only require a year or so in business. If you haven’t officially established your business, even if you’re not making any money yet, do it. That’s the official date your business started and when the bank’s ticker starts.
Traditional lenders like bankers want to collateralize small business loans to reduce the amount of their exposure and risk should you default. Since a banker can’t really collateralize a great idea, it’s difficult for them to offer you a loan.
That doesn’t mean financing is out of the question. If you’re business is just beyond the startup phase, has good revenues, and you have a good personal credit score, there are credit options available. You might not find success with a five- or 10-year term loan, but you may find short-term financing to help you purchase equipment or buy inventory.
Earlier this year Wells Fargo announced it would be devoting more resources to small business lending. Good news for small business borrowers, right? If you have a good business and personal credit score, have collateral, and can demonstrate the cash flow to make the loan payments it could be great for you. If not, you’ll need to spend time building a better credit profile—in other words, reduce the risk associated with lending to you.
As a young business with little or no business credit history, it’s standard practice for the banker to look at your personal credit history to get a snapshot of your credit worthiness. That’s great if your personal credit score is upward of 720, but a 650 credit score (or less) isn’t going to help you. And, even after you’ve been in business for a while, bankers want to know your personal credit score, so it’s very risky to ignore it.
There really aren’t any shortcuts to improving your credit profile, but with six months of focus on paying your bills on time and monitoring your credit score, you may be able to bump your personal score up as much as 100 points.
Understand The Other Options That Still Exist
Bootstrapping is probably the way most Main Street businesses get off the ground. Even though it might not be considered the easiest way to get things going, it’s the way most small business owners get past the first few years. Although most small business owners think of the bank when they need to borrow money, many business owners choose to invest personal savings or leverage the equity in their home to get things off the ground.
Friends and Family
Although friends and family isn’t the most popular place to look for funding, it’s still a viable option and where the vast majority of small business owners find capital. In fact the success rate is better than grants, crowdfunding, credit cards, and other types of online and offline small business lending.
Your vendors want you to succeed almost as badly as you do. Although a vendor probably won’t offer capital to help you start your business, they may offer special terms to give you a little leeway. Some venders will even set up a floor planning arrangement so you can stock inventory and pay for it as it sells. Of course, this isn’t something they will do if your credit is questionable or you don’t have some kind of track record with them. In many cases it might even be as easy as approaching a vendor to see if they regularly offer a financing program for their distributors. At the very least, it’s likely they can offer advice as to what merchandise you need to make sure you avoid stocking too much of the wrong stuff.
Personal Credit Cards
A lot of business owners leverage their personal credit cards to access capital for their business. Although this is a popular way to use credit, using your personal credit card over a business credit card probably isn’t a really good idea. Because credit card companies report to the credit bureaus at the time they invoice you, even if you pay them off immediately, it’s the amount of credit you’re using compared to the amount of credit available that impacts your score. Most credit card companies report on your personal credit report—potentially lowering your personal credit score.
Business Credit Cards
It makes sense to use a business credit card for business, but it’s important to make sure they report to the business credit bureaus. This will allow you to better manage your personal credit score in addition to you business credit score. It might even help you improve your personal score.
Crowdfunding is a relatively new way startups access capital. Basically you mobilize a group of people to donate small amounts of money toward a common goal, such as the creation of a product, the funding of a non-profit, or the creation of a small business in exchange for something of value, possibly early access to new products or maybe even equity in the company. Since it’s beginnings, crowdfunding has evolved to allow small equity investors to contribute to your startup.
Depending on the type of business you’re starting, how far along you are in developing your product, and your ability to “sell” your idea on one of the many crowdfunding platforms, it could be a good way for you to fund your small business.
There are also a lot of options available online for small business owners with at least a year in business (though there are some that will work with a newer business). Online lenders don’t typically hold you to the same rigid credit criteria a traditional bank might, but you’ll need to have some business history to find success with this type of financing—so it’s usually not a good option for an early stage startup. Factoring companies, merchant cash advance (MCA) providers, and other online lenders offer loan products designed to help small business owners that have been turned down at the bank access capital. Some are more expensive than others and terms vary from lender to lender, but a little homework will help you determine which of these loan types might be right for you and your business.
There are a number of resources available to help small business owners get started, here are some that will help you manage your credit along with some good advice on successful business practices.
In addition to resources offered by the SBA, SCORE has been providing mentoring and advice to business owners for the last 50 years. The SBA offers a lot of online information you can review at your convenience. In addition to what SCORE has online, you can also sit down and visit with an experienced business professional (often someone who has retired from a successful business) to talk with you about your business.
Dunn & Bradstreet, Equifax, and Experian are the three major business credit-reporting agencies and have lots of great information on topics like improving your credit score, collecting debt, regulatory compliance, and other credit and debt related advice.
Because your personal credit score is so important in the early stages of your business, you should also bookmark the three primary personal credit-reporting agencies, Experian, Equifax, and TransUnion.