Many people who open small businesses are creative types first and business types second. They're artists in the bakery, for example. If their success simply depended on customers loving their cupcakes, they'd have it made.
Unfortunately, there's a lot more to running a small business than excelling at a product or service. Dealing with finances can be a major headache. When I ran my first business, a sign manufacturing company, I had a healthy balance on my accounts receivable, but was cash poor and losing sleep over it.
I had never built personal credit, so I had no credit cards or lines of credit to help me bridge the gap. My saving grace became business credit. Business credit is a marvelous tool for managing cash flow, opening new doors for entrepreneurs hoping to take their business to the next level.
Savvy entrepreneurs will do everything they can to learn their credit options in order to maximize their capital. Knowing what's important to lenders before applying for financing will help.
What lenders look at.
First, lenders will closely inspect how you've managed credit in the past. They'll also want to know whether your business is profitable, as positive cash flow will increase the likelihood of repayment.
Then there's the matter of capital and collateral. Have you invested personal capital into your business? Do you possess assets that can be utilized as capital to secure your lender's investment?
Finally, a lender will ask about your experience in your industry. The more experience you have, the better. Being a newcomer won't necessarily kill the deal, but some lenders prefer to work with entrepreneurs who've been in the game for a while.
The sooner you grasp these factors, the sooner you can begin working to improve them. Building a strong credit profile will move your business forward by leaps and bounds.
Why applying for a business loan Is hard.
Most of us have a solid grasp of consumer credit. You need a credit card or a loan, you fill out an application, and success or failure depends on factors like your personal credit score and income.
Commercial credit is a different animal. I made this unhappy discovery myself as a new entrepreneur, and I've worked with loads of other entrepreneurs who found themselves in the same leaky boat.
Consider a guy I once worked with who made real estate signs. He'd been doing it forever; his personal and business credit scores were solid. He approached me for assistance because he couldn't get lenders to return his calls in spite of his history and reputation.
My business partner and I went into sleuth mode. After making some calls and doing some research, we discovered that our client was the victim of a clerical error. His business's SIC code was listed incorrectly, which made lenders believe that he was a real estate agent rather than just a guy who constructed and sold signs.
He was applying for the wrong kind of financing as a result, and his turndowns were automatic.
Breaking it down.
Many problems small-business owners experience can be attributed to the fact that the data shared between the three major commercial credit bureaus is inconsistent.
Try an experiment. Check your business credit reports from each of the bureaus, looking for any discrepancies between the reports. If you find them, blame it on the fact that business credit card issuers are far less consistent in reporting their data than their consumer counterparts.
This means you can never rest on your laurels, even if you consistently pay your bills on time. If those payments aren't being reported to the bureaus, your hard work is being wasted.
Another major difference between consumer and commercial credit reporting is the frequency with which your business credit can be checked. Lenders can pull your consumer reports in specific situations regulated by federal law.
With commercial credit, on the other hand, it's more of a free-for-all. Anyone from your merchant processor to your payroll server can check your business credit scores at virtually any time.
This calls for diligence on the part of business owners, because you should assume that your business credit scores are being scrutinized a lot more often than your consumer credit scores.
How to make things easier on yourself.
Three words will make your business life easier: education, education, education. Decide exactly why you're looking for financing, and exactly how much money is required for your venture.
Learn as much as you can about the most common types of business financing and the ideal types of businesses for each. Start with:
SCORE Mentors: SCORE provides free mentorship and live workshops for business owners on a variety of subject areas, including financing.
The Small Business Administration: The SBA works with various lenders to provide government-backed financing to small businesses. SBA financing is often difficult to qualify for, but offers competitive terms to those who do qualify.
Be intimately familiar with your personal and business credit scores and know your reports backward and forward.
Never approach a lender without knowing their requirements first, because ignorance will cost you a great deal in time and money.