Author: ASBDC

Author: Sharita M. Humphrey

A company’s capacity to buy something now and pay for it later is referred to as business credit. You may make it easier to borrow money when your firm needs it by obtaining a solid business credit report. It is a document that contains a picture of a company’s financial credit health.

It will include.

• Company’s financial background
• Payment history on tradelines
• Current credit inquiry history
• Any legal filings, such as judgments, collections, and bankruptcies

While each credit bureau’s report will differ slightly in appearance, they will all contain the same information. As you proceed through the process of securing a small business loan, it’s a good idea to buy a credit report and understand it. Any business credit report you buy should include the following items.

1. Financial History Section

The Financial History Section is composed of commercial banking, insurance, and leasing data. Your payment history with creditors, lenders, and insurance are shown in this section.

It displays information such as:

• The date the tradeline was opened
• The terms
• The original and current balances
• Any account delinquencies
• Business loans
• Insurance policies
• Lines of credit
• Equipment leases

2. Collections Filings Section

Any legal filings, bankruptcies, or collection reports that your company has filed are in this area. Tax liens, judgments, and accounts that have been in collections for 90 days will be included here.

It includes details such as:

• Open and Close dates of your collection filings
• Agencies and their contact details
• The status of your collection
• Amount disputed
• Amount collected

Lenders are less likely to give loans to you if you have a lot of court filings on your background.

3. Tradeline Experiences Section

The Tradeline Experience Section shows the tradeline payment history of your business. Displayed in the tradeline payment history section is your company’s payment history over the last three years. Payments to vendors are frequently included in this section.

In addition, here are some details included in this section:

• The time your business was first initially reported to the credit bureau
• Payment terms
• Recent high credit line
• Maximum credit line
• Monthly payment, whether it’s current or past due

It will also tell you how many times you’ve passed due on a tradeline for 30 days or more.

4. Business Profile Section

The business profile or company information section is the first thing that appears on a small business credit report. The legal name, address, and data about the company’s incorporation are shown in this section.

It also includes other business data such as:

• Ownership subsidiary information
• The number of employees
• Type of business
• Years in business
• SIC code (Standard Industrial Classification)
• NAISC code (North American Industry Classification System)

5. Business Credit Score Section

A credit score will be included in a company credit report, just as it is in a personal credit report. Each credit reporting bureau has its own credit scoring range. They should all produce an easily understandable number.

A business credit report states some business information such as:

• Your company’s degree of credit risk
• The reasons that went into calculating your credit score
• A prognosis of your company’s future credit risk based on your report

Credit reports and scores for businesses are indicators of a company’s financial soundness. Business owners’ primary goal should be to develop a track record of regular payments on all their financial obligations. It is a must to build a strong business credit report and score.

Here are some common factors that could affect your business credit score:

• How much credit do you have
• How long you’ve had credit
• How many late dues do you have on your credit report

You can try to buy a business credit report to help you maintain track of your company’s credit health. It is regardless of which credit reporting agency you choose.

Business Credit Reporting Agencies

There are many business credit reporting agencies you can trust. In most cases, all company credit reports contain the same information. They have common key data components even when they have a unique process for validating and collecting data.

The following are some of the most well-known business credit reporting organizations.

Dun & Bradstreet

It is the credit report that is most widely used. D&B assigns credit ratings to businesses based on many indices that represent their current and future financial risk.

Experian

To calculate its score, it gathers business data, payment and collection history, and financial data. The Credit Ranking Intelliscore from Experian goes from 1 to 100, with 100 being the highest attainable score.

The FICO® SBSS

It is most commonly used for SBA (Small Business Administration) financing. To generate a credit score, it gathers information from all three credit bureaus.

Conclusion

The more efforts you take to establish business credit, the more financial prospects your company will have. Banks, lenders, and suppliers use business credit reports to determine a company’s creditworthiness. So, make every effort to control your debt and keep on top of payments.

You can start to make paying bills on time a priority. Resort to make a budget, cut back on certain purchases, or set up payment reminders. Any late dues will have a negative impact on your company’s score. And it will make it harder to attract lenders, partners, or investors in the future.

Don’t hesitate to seek professional help from a financial counselor. It helps in times when your company does find itself in debt.

About the Author: Sharita M. Humphrey is an award-winning finance expert, money mentor and Certified Financial Education Instructor. Once broke and homeless, Sharita completely transformed her life and is now a successful entrepreneur and one of the most in-demand money coaches for individuals and business owners of color. In 2020, Sharita was named National Financial Educator of the Year.

Getting a small business loan is a daunting task for many company owners, simply because it can be time-consuming to gather all the documents needed to apply. If you’re looking to secure any type of financing to increase capital, having a checklist of the most common requirements will go a long way in expediting the application process.

Before diving right in, take note that lenders consider a number of factors when requesting documents. The requirements may vary based on time in business, your industry, credit score, and the type of loan you’re trying to get.

For example, applying for a business line of credit won’t necessarily require you to have a good credit score, although having solid financials will mean you’ll get lower interest rates.

On top of that, traditional lenders like banks and credit unions are stricter when approving loan applications and may require more documents to prove your creditworthiness. Alternative lenders, on the other hand, are much more lenient.

The business loan documents listed below are the most common requirements borrowers must submit to the lender they will be working with. If any of these documents are not submitted (or for some reason the information you provided is incorrect), your application may be at a higher risk of getting rejected.

Business Loan Application Requirements

1.  Income tax returns

   Lenders require your most recent Income Tax Return (ITR) because it illustrates how well your business performed in the previous year. It verifies your income, and uses the information on your ITR to determine the amount of money they could loan you.
   Also, your ITR shows your debt-to-income ratio, which is the percentage of your monthly gross income used for paying off debts. If your debt-to-income ratio is high, lenders might consider you a high-risk borrower.
   To give you an idea, your debt-to-income ratio must be below 43%. You can calculate yours by dividing your monthly debt by your gross income. For example, if your monthly debt is $15,000 and your gross income is $55,000, your debt-to-income ratio is 27% ($15,000 / $55,000).

2. Financial statements

   Financial statements are a critical barometer of your business’ success. They give lenders an overview of your organization’s financial position and cash flow.
   Like your ITR, financial statements are used by lenders to determine if your business is keeping up with expenses, what your income sources are, and whether you are generating enough money to take on another debt.
   There are three key financial statements you need to prepare beforehand: your balance sheet, profit and loss statement (or your income statement), and cash flow statement.

   • Balance sheet – gives you a general overview of your assets, liabilities, and stockholders’ equity
   • Profit and loss statement – gives you an overview of your company’s revenues and expenses. Your P&L statement will also show your net income at a certain period of time.
   • Cash flow statement – shows the inflow and outflow of cash in your business. This demonstrates whether the company is making enough money to pay its creditors, has enough cash reserves, and how much goes to operational expenses.
     Lenders use all these financial statements to evaluate your business’ financial health, as well as income potential. It is also used to check which assets may be used as collateral when applying for a business loan.

3. Proof of business registration

   To prove your business’ legitimacy, you need to provide legal documents such as business registration, licenses, permits, articles of incorporation, copies of contracts with third parties, franchise agreements, and other documents that prove you are operating your business in good faith.
   In some instances, borrowers show their commercial lease agreements, payroll documentation, and certificate of good standing. This certificate indicates that the company is up-to-date with state-required filings and taxes, giving lenders a better idea of where your business stands.

4. Good personal and business credit

   When applying for small business loans, you need to know both your personal and business credit scores. You can obtain copies of your credit reports from TransUnion, Experian or Equifax so you have an idea of your credit standing.
   To give you an idea, personal credit scores range anywhere between 350 to 850; meanwhile, business credit scores are any number below 100. For banks and alternative lenders to trust you, you must have a personal credit score of at least 580. This score shows lenders that you are a good payer.
   Here’s an instance: if you are applying for an SBA 7(a) loan, the minimum credit score requirement is 650. If you’re getting an SBA microloan, the minimum credit score is 620, plus collateral. For short-term loans, you may need a minimum of 540. Note that this will all depend on your qualifications, so you need to speak with a finance expert to discuss your options.
   If you’re having trouble on this front and think that your credit score isn’t in good shape, you may want to explore financing options from lenders who aren’t strict. No credit check business loans include a business line of credit, invoice factoring, and equipment financing, although you have to put up collateral to minimize the lender’s risks.

Don’t be afraid to ask

Understanding the ins and outs of business financing takes a lot of work. With so many options to choose from, you need to consult a finance expert to know the best funding for your business.

As for the documents, once you’ve prepared these requirements beforehand, you won’t have a problem during the application process. Provide accurate and legitimate information to your lender to secure a loan in no time.

ABOUT THE AUTHOR

Matthew Gillman is a business financing expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialty finance company providing education and financing options for business owners.

Author: Sharita M. Humphrey

Debt has a bad reputation. If you’re thinking of high-interest credit cards and financing that exceeds your ability to pay, that kind of debt deserves the bad rap. However, as a business owner or entrepreneur, you’ll experience times when debt is necessary to take your business to the next level. We call this debt financing.

Understanding Debt Financing

Simply put, debt financing is borrowing money from an investor, bank, government entity, or another company in order to finance your current business needs. You’ll agree to repay the loan, plus interest, in a given timeframe.

How is debt financing beneficial to your business?

As a business owner, you take risks in order to grow your business. Debt financing is no different. If you evaluate the amount of risk as compared to the level of benefit you expect to see from the investment, you can make a well-informed decision about whether financing is right for you.

Here are a few key ways to improve your business by leveraging debt.

1. Maintain Business Ownership

   The foremost advantage of this is that the ownership and control of your business remains yours (or with the shareholders). Despite the necessary fees and interest, the lender does not gain control over how you run your business. And in a worst-case scenario in which you end up defaulting on the loan, only the collateral is taken and not your entire business.

2. Reduce Government Taxes

   Debt financing is also a practical action to pursue as the government allows you to file for a tax deduction on the fees, interests, and other charges related to this type of financing. This means your business will not have a double tax payment for the same charges.

3. Provide a More Affordable Financing Option

   As opposed to equity financing, wherein a portion of the business is sold off to the investors, debt financing simply focuses on settling the debt and its interests. Debt payment is the only obligation for the business, so you don’t have to fear reducing a portion of your business when the journey gets shaky.

4. Easy Access

   Debt financing is relatively easy to obtain. Unlike taking on an investor, you don’t have to go through rigorous investor evaluation or serious negotiations to determine what percentage of the business will be owned by you and your investor. You simply apply for this kind of debt with its straightforward process and prepare to pay the principal and interest as your agreement dictates.

5. Build Credit History

   As a business owner, acquiring good credit history will allow you to continue to access great credit options in the future. Managing the repayment of your financing loan will demonstrate your responsibility in handling your credit in a consistent and timely manner. Debt financing gives you the chance to strengthen your business credit, making it easier to apply and be granted financial backing as your company continues to grow.

6. Enable Good Planning

   Settling your fees and interest with debt financing can be established through adequate planning. Because the amount you pay is fixed, you can project your expenses specifically month after month. Your business budget will be simpler, leaving you free to plan your other expenses.

7. Presents Flexible Loan Options

   Similar to any other type of loan, debt financing is also good because you have the option to decide whether you’re paying it in the short term or long term. Depending on your current business needs, the timeliness of settling your debt could be flexible. You and your lender can discuss the pros and cons of the different timelines available.

When is the right time to start debt financing?

Gaining adequate knowledge in this topic is a wise action as you nurture your business towards growth. Everybody wants growth and progress, no question on that. As you do your research, you’ll be able to decide if financing is the right decision for your business at this time.

Look for reliable information and trusted advisors. You can navigate your business path wisely when you are confident you have the backup you need.

Where do you go from here?

At the end of the day, exploring the options in debt financing for your business is up to you as a business owner.

Most importantly, do your due diligence to make an informed decision before you jump into any crucial financing decisions. If you want to learn more about business financing and other financial principles, reach out to us. We would be honored to help you on your journey.

And if you also have any insights or experiences to share regarding debt financing, leave a comment below. We look forward to hearing from you.

About the Author: Sharita M. Humphrey is an award-winning finance expert, money mentor and Certified Financial Education Instructor. Once broke and homeless, Sharita completely transformed her life and is now a successful entrepreneur and one of the most in-demand money coaches for individuals and business owners of color. In 2020, Sharita was named National Financial Educator of the Year.

By: Sharita Humphrey

Business Financing refers to money borrowed from a bank or investor to finance equipment, products, or services that the business needs in order to grow. When setting up your business, you’re likely to apply for financing to get your business off the ground. However, there are several reasons your application might be denied.

In fact, according to 2021 statistics, it was reported that 9% of small businesses that applied for a business loan did not receive any capital.

Here are 5 reasons why you’re not getting business funding:

1. Credit score.
   A company with a low business credit score is going to have a hard time getting approval for a business loan application. According to 2021 statistics, 36% of small businesses were denied funding due to low credit scores. Credit score plays an important part not just in business but in personal life as well. Most banks and financial institutions look at both the business owner’s personal credit score and the company’s business credit score to determine the interest rate and loan eligibility. When applying for business financing, make sure to keep track of your credit score to avoid being rejected.
2. No collateral.
   Before institutions lend money, they require collateral in case the borrower becomes unable to repay the loan. The amount of money they will lend depends on the value of assets the business has as well. The higher the value of the collateral, the more money they will consider lending. However, if your company is new, with no little to no physical assets, you may have to offer up personal assets (cars, homes, etc.) as collateral. If you aren’t willing to make this decision, you might face a rejection of your financing application. Lack of collateral has become the biggest for small businesses being unable to secure financing.
3. Insufficient cash flow.
   Banks will be hesitant to grant loans to small businesses that don’t offer a large enough cash flow to pay off the loan. Often, small businesses struggle to maintain financial stability especially when they’re still starting up. This is partly because they have to pay off rent, third-party suppliers, equipment, and employee wages. In order to secure a business loan, first check to make sure that you’re bringing in more profits than you’re paying out in expenses. You need to have cash flow to be considered for business financing.
4. Too much debt.
   When you apply for a business loan, a bank will look at past loans, whether you were able to pay them off and how efficiently. If they discover one or more ongoing debts, they may reconsider your application. It doesn’t look good for a business to have too much debt as it shows poor financial management and low income. Settle past debts and make sure they’re paid on time and properly, so you’ll have more loan opportunities to expand your business.
5. Too early into the business.
   Most banks won’t lend finances to emerging small businesses since it may be a risky venture. Lending money to a small start-up business is like taking a leap of faith. Either you’ll profit from the continuous payments when the business booms or fall when it fails. There’s no guarantee that the business will make enough profit, much less pay off the loan. Banks or investment companies will need security that a business can grow and continue to make payments.

Now that you’ve considered reasons your application may have been denied, here are a few things you can keep in mind when applying for business financing:

• When starting a business, create a thorough business plan and demonstrate an understanding of investments. Engage and upgrade your business vision so that investors won’t regret investing in your business. Look for multiple investors to ensure you have enough funding.
• Crowdsourcing is a good way to find investors. If your business is too small to go to traditional banks for a business loan, you may want to consider alternatives that are willing to invest in small businesses. You may find small firms or financial institutions whose purpose is to help startups or small businesses get off the ground. Double-check to make sure they are legitimate to ensure you won’t suffer loss through scams.
• Know your business. Do your research. It’s going to be difficult to get funding for your start-up business if you don’t know what you need to do. Research the requirements for a business loan, get statistics on approval rates, reach out to a few investors and plan out your business strategy to keep your company afloat.

Conclusion

Most business loan rejections are due to the five points above. But you can set your business up for success by creating a solid business plan, doing your research, and managing your finances well from the start. Work your way toward not needing to apply for any more business loans with a healthy cash flow and strong profits.

References:

• https://www.fundera.com/resources/small-business-lending-statistics
• https://www.nerdwallet.com/article/small-business/business-loan-denied
• https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/business-financing

By: Matthew Gillman

If you’re running a limited liability company (LLC), you may find you need to raise money or get a small business loan to start up or fuel growth. Many small business fail in their early years simply because they ran out of cash, or they weren’t able to plan their finances well.

This is where a business loan comes in: you could use more capital to fund your LLC’s expansion, get more manpower, and purchase equipment or hardware. You could also use the money to pay down debts or have for emergencies.

Below are the different business loan options you should consider for your LLC.

5 Best Business Loan Options for LLCs

1. Bank loans
   • Traditional lenders like banks and credit unions offer the most ideal loan amounts, terms and interest rates, which is why many business owners apply from them.
   • However, your business must meet their strict qualification requirements, such as high credit scores and longer time in business. The reason for this is that banks need to minimize their risk of loan payment defaults. And they have a good reason for it.
   • During an economic downturn, smaller companies are riskier to invest in than their larger counterparts due to a number of reasons such as lack of credit history or increased regulation. This makes it difficult for many LLCs and startup businesses to obtain a loan from banks.
2. Term loans
   • Business term loan is a type of traditional business financing where you repay your lender over a specified period. This ranges anytime between a few months to ten years, depending on the stability, structure and credit standing of your LLC.
   • In some instances, lenders may require you to put up collateral to secure lower interest rates or higher loan amounts. Collateral provides security for the lender so you have to be willing to risk your assets to get a term loan.
3. Business line of credit
   • A business line of credit is one of the most ideal types of alternative financing, simply because you are given access to capital on an as-needed basis. With a line of credit, you are not required to use the full amount granted to you; instead, you can draw money from your account whenever you need cash and pay it back with interest.
   • What’s great about a line of credit is you don’t have to pay a fixed amount of loan repayments or interests if you didn’t use the money. It’s also a revolving credit, so you can just repay what you’ve used and withdraw the funds again in the future.
4. SBA loans
   • SBA loans are those that come from private lenders and banking institutions but are backed by the Small Business Administration. The terms usually range anywhere between 10 to 25 years, with interest rates that are favorable to small businesses and startups.
   • There are different types of SBA loans: SBA 7(a) loans, 504 loans, disaster loans, microloans, and express loans. The most popular is the 7(a) loan, which gives you up to $750,000 worth of loan amount plus a partial guarantee from the SBA. To give you an idea, the SBA guarantees 85% of the loan up to $150,000 and 75% if the loan amount is more than $150,000.
   • SBA loans may be used for short- and long-term working capital for office repairs, debt refinancing, or purchase of new equipment. Note that the qualification requirements to get an SBA 7(a) loan includes a tangible net worth between $2.5 million and $7 million, plus a good personal credit score and strong business cash flow statement.
5. Invoice financing
   • Last but not the least is invoice financing, which allows you to use unpaid invoices as collateral in exchange for upfront capital. With this type of financing, lenders will give you 80% to 95% of the total value of your invoice. You will receive the remaining 5% to 20% of the invoice value (minus service charges and transaction fees) once your customers pay.
   • Invoice financing is a preferred option by many businesses because it frees up the cash tied to their outstanding invoices. It’s also easy to have your application approved, since lenders would not require you to have a good credit rating. What’s more important to your lender is your customers’ creditworthiness.
   • This is a good financing option for companies in the B2B space. Lenders are happy to accommodate invoice financing applications from business in the transportation, logistics, wholesale, manufacturing and technology industries, but all types of LLCs will benefit as well.

More capital means more room for growth

Ensuring that the business has sufficient funds and maintains positive cash flow will almost always guarantee its success. Financing helps bring in more stability to the LLC, since company owners have capital to make strategic growth decisions.

If you’re not sure where to start, talk to a finance expert and ask about your options. Ideally, find someone who’s already familiar with your industry to increase your chances of getting loan approvals.

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Matthew Gillman is a business financing expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialty finance company providing education and financing options for business owners.