When you first stepped into the world of entrepreneurship, you probably knew that sooner or later you would need to apply for financial credit. Whether it’s a laptop for freelance consulting or a warehouse full of inventory, credit is part and parcel of any business, and it plays an even larger part in your business growth plans.
Yet it pays to approach the process carefully. Truth is, anyone can apply for business credit, but getting accepted is a lot harder than you might think.
A 2015 survey by business credit advisor Nav found that 1 in 5 small business owners had been turned down for business credit between 2010-2015, and 43% had been rejected more than once.
Unfortunately, the situation seems to be getting worse. According to Fundera, the number of small business owners who have been rejected for a bank loan now stands at 80%.
That’s a staggering number.
On top of that, Fundera reports that over the past two decades, small business loans have fallen from about half to under 30% of total bank loans. As a result, it’s increasingly difficult for small businesses to find banks willing to lend to them.
So why is it so difficult to get approved for business credit? More importantly, what can small business owners do about it?
First it’s important to understand what banks and lenders look for in a business before they decide to offer credit.
Typically this boils down to three key elements:
1. Cash flow: Lenders will examine your business as part of their due diligence. One of the main things they look for is healthy cash flow, as this is a strong indicator that you will be able to repay the loan to the agreed timescales.
2. Collateral: Should they need to recoup their costs, lenders require some form of collateral or physical asset. This can include business inventory, property, or even unpaid invoices.
3. A good credit score: Lenders will assess the ‘credit worthiness’ of your business to decide whether you are a trustworthy borrower. They look at multiple factors, from your own personal credit rating, to your relationships with vendors and whether you pay your bills on time.
All of these elements come down to good business practices. The one we’re going to focus on is step three.
This is about your business credibility. In other words, are you a credible borrower?
It’s not a simple check in a box, but there are certain steps you can take to build business credit and boost your chances of funding success. Part of this is ensuring your business looks credible from the outside.
Put yourself in your creditors’ shoes. Which organization would you trust more: one that’s been trading for several years, with good supplier relationships and timely bill payments, or a new startup trading from a home address and a cell phone? That’s not to say startups can’t get credit, they certainly can, but you need to do everything possible to build your credibility and position your business as a thriving, trustworthy loan candidate.
Here are some of the fundamental steps you should consider in order to build your business credibility ahead of a funding application:
Ensure your documentation is in order.
Use your full legal business name on all documentation and ensure it matches across the board. Get a federal employer identification number (EIN) — you’ll need this number for all federal tax filings and to open a business bank account. Check and double check all the information you add to your application; strange as it seems, many rejections actually come down to simple administrative errors.
Incorporate your business.
According to Experian, registering your business as an LLC or a corporation not only provides a credit history for your business, but also protects your personal assets by legally separating your business and personal profile. It effectively proves that your business is a separate and thriving entity.
Use a corporate address and a business phone number.
For small businesses and those just starting out, it’s not always financially viable to get an independent office space. If you don’t have a full-time office space, you can use a virtual office address and a business phone number (we recommend using a registered agent to handle all SOP mail).
Open a business bank account.
Open an account in your business’s legal name and use it for all business transactions.
Work with creditors.
Build good relationships with suppliers that are relevant to your industry. It helps you to establish positive lines of credit and shows that you regularly pay your bills on time (ahem, make sure you do).
Remember that lenders will look at multiple factors when deciding whether to extend credit to your business. This will include a P&L statement, your business plan, and six or more months of business bank statements, among others.
It pays to do your groundwork first. It may take a little while to build up your business credibility, but it’s worth checking off all the necessary steps before you spend time and effort making a credit application. Do it right, and you could soon be well on your way to gaining the credit you need to take your business to the next level.