The reality of business funding for startups and young businesses turns out to be entirely different than most people imagine. At the same time, it’s vitally important for entrepreneurs to understand how to finance their companies through the startup and growth phases. The vast majority of new businesses don’t fail because they lack good ideas or good people; companies fail because they can’t pay bills long enough to sustain themselves. Both good personal and business credit scores can help overcome this issue.
Why Business And Personal Credit Scores Matter for Startups
The Small Business Administration (SBA) published an extensive report on the ways that entrepreneurs fund young and growing companies. In order to understand business funding, it’s helpful to learn how other companies finance themselves.
The majority of young companies rely somewhat on the owner’s personal resources. Personal resources might include an owner’s savings and access to personal credit. In fact, the SBA found that some of the most common sources of new business funding included savings from the owner, the owner’s relatives and personal loans. Personal loans might come in the form of cash advances from finance companies, personal credit cards, or even home equity loans and unsecured bank loans.
While relying upon personal resources may be common, it’s also limiting to entirely rely upon personal credit and assets for a few reasons:
- Unless the owner commands great wealth, resources are limited.
- The owner needs good credit in order to obtain financing under his or her name.
- Using personal credit to finance a business is common; however, it also negates some of the protection usually afforded by incorporating a business.
Why Work to Improve Business Credit Scores?
Young businesses should make it a goal to improve credit scores in the name of the company. Some budding entrepreneurs may hope to obtain funds from so-called angel investors or partners. Only a small percentage of new companies can find venture capitalists. In addition, obtaining investment money usually also means giving up some control of the company. This idea isn’t appealing to all budding entrepreneurs.
Bank loans are still a common source of funding for small businesses. Still, traditional banks usually require some evidence of good business credit and owner equity in the company. This is true even with most SBA-backed loans. The loan process at a bank or credit union typically requires lots of documentation and is usually a slow process. A bank might offer low and could provide a good solution if the loan gets approved.
What If Business Bank Loans Get Denied?
Small and new business owners may not have great credit or had the chance to build a large owner stake in their company. These days, business owners have other sources of financing beyond banks or credit unions. Emerging alternative lenders, including online lenders, may make funding more accessible to certain types of new businesses. Some lenders don’t have to rely only upon business credit scores and owner equity to approve loans.
Alternative lenders may use information from payment processing companies, business bank accounts, and even Internet retailers to validate the legitimacy of a business. Typically, most of the application process occurs online. There’s no need to schedule appointments with loan officers or gather reams of documentation.
These loans may also be approved and funded very rapidly, often within a day or two. Online lenders may offer flexible loan amounts that are more suited to the needs of startups, rather than the large, long-term loans preferred by banks these days.
Business Owners Should Have a Goal of Maintaining Good Business and Personal Credit
Companies need sufficient funding in order to thrive. Business owners who can maintain good business and personal credit scores have a great advantage because they will have many funding sources from which to choose. However, it’s possible for business owners to obtain funding without excellent credit. Any funding should be used to work toward the goal of making the company and the owner a better credit risk in the future. This means that owners might consider loans that give them a chance to increase profits and manage company finances better.
Tim Roach is Co-founder of Lendr, a provider of merchant cash advances for small to midsized businesses. Roach holds a B.S. in Finance from Linfield College and served in the United States Navy at Seal Team One. Before joining Lendr, Roach founded Oak Street Trading in 2002, a proprietary trading firm.