For most entrepreneurs, finding funding to fuel growth is a huge challenge.
And it can be especially difficult for businesses that traditional lenders deem “high risk” because of low credit scores, limited business history or even industry-type.
That’s why so many of us relied on personal funds or help from friends and family to get our business idea up and running.
Going this route can work at first, but even if you’re come out of the gates on fire, profitability usually remains elusive in those first couple years. You usually won’t have time to wait on revenues alone to fund expansion.
Fortunately, there are creative ways to get business financing these days. At last count, forty-four different types of business financing exists.
More options may seem sweet on the surface, but the devil is always in the details. You need to make sure you get approved for funding that makes sense (i.e., won’t put you out of business trying to pay back).
So, before we get to what a few of these financing options are, it’s vital you start taking care of a critical step in the business financing process: managing your business’s credit profile.
Like your personal credit, your business has its own separate credit profile and scores. And while your personal credit is one of the main factors when it comes to getting funding to start a new business, when it comes to expansion, your business credit scores take on a larger role.
That’s because lenders want to evaluate how your business has performed. The better your business credit profile looks, the more likely you are to get approved for funding at the best rates.
In fact, Nav’s 2015 small business owner survey showed that business owners who managed their business credit scores were 41 percent more likely to get approved for a bank loan.
Here are a few tips to help ensure your business credit profile looks "good" to potential lenders:
Keep Business and Personal Finances Separate
If your finances are blended, there could be significant consequences to your personal credit if the business fails or you are sued. And if you’re relying on personal credit cards to run your business, and miss a few payments or max out your credit utilization, your personal scores can drop by 100 points.
One of the easiest ways to build credit in your business’s name is by opening a business credit card and always paying your bills on time.
Monitor Your Business Credit
Without actively monitoring your credit reports, you may never know if your business credit is being negatively affected by errors. According to a 2014 Wall Street Journal survey, 25 percent of business credit reports had errors that made the business look riskier than it actually was.
Plan for Cash Flow Hiccups
Even if your day-to-day business operations are strong now, it doesn’t mean there won’t be ups and downs in the future due to things like seasonal lulls and customers who don’t pay on time. You can cover yourself during cash flow crunches by establishing a credit line to access short-term capital. That way you’ll always be able to pay your bills on time and protect your credibility.
Once you’ve built a strong business credit profile, a wealth of financing options should be available for you. But, if you need to get creative, here are a few that may be right for you:
There are two popular options here, equity and reward crowdfunding. Reward crowdfunding is the exchange of a reward (product, thank you note, etc.) for capital, while equity crowdfunding involves giving a slice of your company to investors. Equity crowdfunding has a particular allure in fast growing industries, as investors are looking to multiply their money by five times or more.
Reward crowdfunding can serve as a way to acquire capital as well as validate your business and reach a whole new set of potential customers. There are even niche crowdfunding sites that may work best for you. For example, Credibles, is a site food retailers can use to receive pre-paid funds from their customers.
2. Inventory Financing
This option only works for retailers. Inventory financing is a method in which a lender provides funds so you can purchase items to sell at your business. If you’re looking to expand, using an outside financing source to fund your inventory could provide more flexibility, so that it’s easier to use incoming revenue to fund expansion.
3. Credit Card Stacking
Compared to other business financing options, credit cards are a fairly inexpensive tactic for funding. This approach is ideal for startups or low-revenue businesses. Credit card stacking simply lets you use different credit cards with total credit limits that equal the amount of financing you need.
Because of negative perceptions around credit cards, this practice is also referred to as "unsecured business credit lines." Since credit card stacking can be tricky, some lenders will help you do this for a fee.
These lenders usually know about all the card options and can help you get the highest credit limits and lowest rates. Google “credit card stacking" to see which options are available.
4. Online Term-Loans
An online business loan option functions similar to a bank loan, however their rates tend to be higher because their underwriting requirements are more lax. Online lenders also tend have a pretty quick turnaround time (usually between a few days and a couple weeks).
Just be sure to use a business loan APR calculator to know the true cost of your interest payments, and be sure you understand how often you’ll be making repayments: daily, weekly, monthly?
Hitting a period of high growth for your business is an incredibly rewarding feeling, but it can also be frustrating when lenders won’t take a chance on you.
You can increase your approval odds by taking small steps to build your business credit and protect your personal credit. It’s the easiest way to always be prepared for “next.”