Small Business Funding: 6 Steps to Securing the Financing You Need

The Credit Review
October 24, 2019 Business Loans
Small Business Funding: 6 Steps to Securing the Financing You Need

Small Business Financing: Why Getting Approved is Challenging & How to Secure Funding for Your Business

Being a small business owner is as exciting as it is stressful.

You’re your own boss and you get to make the rules of what you sell, how much it’s sold for, and what you do with your profits. However, that responsibility also can be a burden, especially if you need some extra capital to help out your business.

Many small businesses look into getting loans or other financing to help them through a rough patch or to help them expand, but getting funding can be challenging.

In this guide, learn more about why it can be difficult to secure funding as a startup or small business, and what options are open to you.

Obstacles to Funding a Small Business

Funding your startup can be a difficult task.

According to the United States Chamber of Commerce, only about 56 percent of small business loans applied for at large banks are approved. That leaves a lot of businesses that want or need funds to grow, pay down other debt, or keep the lights on without the capital they need.

Here are some reasons why securing small business financing can be challenging:

  1. Lack of Cash Flow

Small businesses, especially “Mom and Pop shops,” have less cash flow than do larger ventures.

Whether it’s due to a smaller client base, a limited service area, or a small marketing budget, cash flow numbers for small businesses can be less than impressive to many banks.

  1. Slower Growth Pattern

It takes a lot to grow a business, and deciding to pull the trigger on that second location or adding some new employees can mean serious financial risk.

Because there’s less of a safety net for many small businesses, and all the decisions are made by a few people who have a large financial stake in the outcome, growth tends to be more slow. As a result, the growth projections aren’t as robust as a larger firm and, in turn, makes it more difficult to prove viability to banks.

  1. Less Collateral

Many loans require collateral in order to secure funding. Whether that means having substantial business assets such as real estate and equipment or a business owner putting up their own house as collateral, this is a necessary step for many applicants.

However, many small businesses lack the large collateral portfolio of bigger firms. This means that it can be more difficult for a small business to qualify for a loan or, if they do qualify, they receive less funding than would a business that has more collateral.

  1. Poor Credit History

Small businesses tend to be headed up by an individual, a family, or a very small board of partners.

This gives the business less cushion from the effects of bad personal credit scores. Most loan companies pull the credit reports on the business’s owners or key stakeholders, and finding out that someone has a low personal credit score can tank a loan application.

  1. No Solid Business Plan

Having a plan and working toward a goal is far more attractive in the finance world than just winging it and hoping it all plays out.

Many lenders want to see well-thought-out plans from business owners with regards to the products and services they offer, their target market, marketing, and other items. However, many small businesses either don’t have solid business plans or any business plan at all.

This can be a turnoff for traditional lenders who want to feel secure in knowing that the money they’re lending will be paid back by the business.

  1. Trying to Do It All

Small business owners are great at handling all the various aspects of their business. However, they’re not always so great at realizing when they could use some help.

Finding financing and applying for loans can be complicated, especially if your business faces unique challenges. Not getting help from someone with knowledge and experience in small business financing can be the difference between a series of rejected applications and getting funded.

  1. Not Shopping Around

There are a wide variety of lending options out there for small businesses and startups, but finding them can be challenging.

Because of this, as well as the pressures of running a business, many small business owners don’t shop around for other lending options when applying for loans. Instead, they pin their hopes on a few larger lenders and get disappointed when they don’t qualify.

Not looking at a wide variety of funding options can cause a great deal of frustration with the application process.

Benefits of Securing Financing for Your Small Business

Businesses need funding for a variety of reasons, ranging from being able to make payroll to opening a new location.

Here are some of the benefits of getting funding for your small business:

It Instills Confidence in Other Lenders and Investors

If someone is willing to lend your business money, that means they trust that you’ll repay it.

Having even one loan under your belt can help you secure financing in the future should you need it, making the process less stressful and more smooth.

Borrowing Creates a Business Credit History

Just like getting and repaying a personal loan or consumer debt helps you build a personal credit history, a business loan helps build business credit history.

With this credit history, you can qualify for further funding down the road if you need it.

Funding Helps Your Operations

Whether you’re looking for funding to build a new building or your needs are more immediate, a loan can help you grow your business in ways that relying on straight cash flow can’t.

With funding, you’re able to continue operations, buy more inventory for a planned busy season, buy new equipment, and a whole host of other things that benefit your business.

More Money Helps You Contribute to the Economy

When people are borrowing and lending money, the economy grows. And a growing economy means more customers coming to your business.

By participating in the small business loan industry, you’re giving people confidence in the overall economy while also helping yourself.

6 Steps to Securing Funding for Your Small Business

Although there are some variations in the requirements and application process for various lenders, follow these 6 steps to give yourself the best chance at being approved for that small business loan:

  1. Determine Why You Need the Money

Lenders want to see that the people they’re lending money to have a strong plan for what they’ll do with the funds.

In most cases, your need for funding will fall into one of four categories:

  • To start your business
  • To manage day-to-day expenses
  • To grow your business
  • To have a safety cushion

The more specific you can be about the reasons for needing financing, the better lenders will understand you.

  1. Decide Which Type of Financing is Right for You

Why you need funding may help you determine exactly what type of financing you go for.

Most lenders won’t consider extending loans to startups, for example, so looking for money to help you get your business off the ground may limit your options. For startups, business credit cards, angel investors, grants, and other alternative financing are usually the best route to go.

For businesses with a track record of cash flow, there are more options.

Those looking for some immediate cash, and who don’t necessarily need a large amount of money, can consider options such as invoice financing. If your business needs a large amount of money and wants to be able to make long-term payments, SBA loans or traditional bank loans are probably the best route to go.

  1. Find the Right Lender

Once you’ve determined the type of funding you’re looking for, it’s time to start exploring lender options.

Thanks to the internet, there are more lending options open to small businesses than ever before.

Traditional banks, lending nonprofits, and online lenders are common choices, and there are a variety of lenders in each category.

Before settling on a specific lender, explore your options. Select a few possibilities and compare them the way you would a car: Look at their interest rates, their requirements, and all the terms and conditions.

If you’re considering going with a traditional bank, be careful. Bank loans are best for businesses that:

  • Have good credit
  • Can provide a decent amount of collateral
  • Who don’t need funding quickly

While banks may offer the lowest interest rates across the board, they’re often slower to process applications and more selective with the businesses they choose for funding.

  1. Check Your Qualifications

Finding the right loan option and lender for your needs ultimately comes down to your individual qualifications for loans.

Here are some things to consider when choosing a lending option:

  • What is your credit score? Many traditional banks prefer excellent credit scores - above 680 - when lending money. Alternative lenders may work with you if you have a lower credit score, but most require a credit score of at least 550 to be considered for loans. Invoice financing and lines of credit are easier to get with lower credit scores.
  • How long have you been in business? Most lenders want to see a history of payments and cash flow before lending to you. If you’ve been in business for less than a year, you likely won’t qualify for any traditional loans.
  • Do you make enough money? Lenders often have minimum monthly cash flow requirements, typically ranging between $50,000 to $150,000, before considering a business for certain types of loans.
  • Can you make the payments? Just because you can qualify for a big loan with hefty repayments doesn’t mean it’s a good idea for your business. Carefully look at your business financials and decide whether you can comfortably make the payments.

Business consultant Suzanne Darden recommends your monthly income being at least 1.25 times your monthly business expenses, including your new loan payment, to help determine the right amount. Borrowing too much can easily get you into bigger financial trouble.

For example, Darden says that, if you have $10,000 in monthly income and $7,000 in monthly expenses (rent, payroll, etc.), you can afford a $1,000 monthly loan payment.

  1. Gather Your Documents

Now that you have a better idea of what loans you plan to apply for and from what lenders, gather as many necessary documents as possible to make the process more smooth.

Documentation requirements can vary based on lenders and specific loan programs, but common requirements include:

  • Business and personal tax returns
  • Business and personal bank statements
  • Business financial documents
  • Business legal documents, such as articles of incorporation, commercial lease, or franchise agreements

Having these documents handy will allow you to apply to multiple loans in a short time span, saving you time.

  1. Apply for Funding

Here comes the part that you’ve been building up to: Applying for funding.

If you’re applying for traditional loans or lending options that will require your credit score to be pulled, you typically have a two-week window before your credit score sees any effects of being pulled multiple times. That means, if you’re applying for multiple loans, be sure your applications are all submitted within a two-week time frame.

Best Small Business Lenders to Consider

The lending landscape is full of great options for small businesses, from traditional lenders to alternative financing options.

Here are 6 of the best small business lenders to consider:

  1. Kabbage

Kabbage offers lines of credit up to $250,000 to businesses. They take monthly repayments, as opposed to daily or weekly like some other lenders.

If you choose their six- or 12-month lines of credit, they frontload your interest - ranging from 1.5% to 10% - for the first two to six months of repayment. The interest rates then drop to 1.25% for the remaining months.

What You Need to Apply for Kabbage

Kabbage requires all businesses applying have:

  • A business checking account
  • At least 3 months of records if you use accounting software
  • Minimum average bank balance of $2,500

How to Qualify for Kabbage

Kabbage offers lines of credit up to $250,000, with different requirements for those seeking less than $100,000 than those looking for more than $100,000 in funding.

If you’re applying for less than $100,000 in funding, you’ll need:

  • Minimum annual revenue of $50,000, or $4,200 monthly
  • Minimum personal credit score of 550
  • At least 1 year in business

If you’re applying for more than $250,000 in funding, you’ll need:

  • Minimum annual revenue of $1 million, or $125,000 monthly
  • Minimum personal credit score of 680
  • At least 3 years in business
  1. US Business Funding

US Business Funding specializes in equipment funding, SBA loans, and working capital loans. They offer funding from $10,000 to $2 million, depending on the product chosen.

Funding can be secured in as little as 24 hours, and interest rates start at 3.5%.

What You Need to Apply for US Business Funding

Requirements for US Business Funding vary based on the product you choose, but some common requirements include:

  • Legal business name
  • Phone number
  • Address
  • Gross annual sales
  • Years in business
  • Business bank statements from the past three to six months
  • Business and personal credit reports
  • Business and personal credit scores

How to Qualify for US Business Funding

Each of US Business Funding’s programs has its own qualifications, but most of their products require:

  • At least 1 year in business
  • A physical storefront or office (cannot be a completely online business)
  • No outstanding bankruptcies or tax liens (unless you are on a payment plan)
  • Solid history of business revenues
  • Minimum average credit score
  1. OnDeck

OnDeck offers short-term loans and lines of credit up to $250,000.

Interest rates start at 8.5%, making them one of the lowest interest rates in the industry. Funding is available in as little as a day to some customers.

What You Need to Apply for OnDeck

To apply for OnDeck, you will need:

  • Three months of business bank statements for short-term loans
  • A voided business check
  • A copy of your driver’s license

How to Qualify for OnDeck

OnDeck’s qualifications vary based on whether you’re applying for a short-term loan or a line of credit.

  • To apply for a short-term loan, you must have:
  • Minimum annual revenue of $100,000
  • Personal credit score of at least 500
  • At least 1 year in business

To apply for a line of credit, you must have:

  • Minimum annual revenue of $100,000
  • Personal credit score of at least 600
  • At least 1 year in business
  1. Rapid Finance

Rapid Finance offers merchant cash advances and short-term loans up to $1 million to small businesses.

Their most affordable lending options are very difficult to qualify for, and interest rates for some of the options can be high.

What You Need to Apply for Rapid Finance

To apply for funding from Rapid Finance, you need:

  • 4 months of business bank statements
  • A voided business check
  • A copy of your driver’s license
  • Your most recent business tax return (for loans over $105,000)
  • Your balance sheet (for loans over $105,000)

How to Qualify for Rapid Finance

Qualifying for Rapid Finance differs based on the product you choose.

To qualify for a merchant cash advance, you need:

  • Annual credit card sales of at least $5,000
  • Minimum personal credit score of 550
  • At least 3 months in business

To qualify for a standard or select short-term loan, you need:

  • Annual revenue of $120,000
  • Minimum personal credit score of 550
  • At least 2 years in business

To qualify for a short-term preferred loan, you need:

  • Annual revenue of $120,000
  • Minimum personal credit score of 550
  • At least 4 years in business
  1. LoanBuilder

LoanBuilder is a PayPal service geared specifically toward small businesses who want flexible funding.

Funding is available from $5,000 to $500,000, and takes the form of short-term loans. Business owners can be approved and receive funding in as little as a day.

What You Need to Apply for LoanBuilder

Documentation requirements for LoanBuilder vary, but the company says to expect to provide, at minimum, four months of business banking statements.

How to Qualify for LoanBuilder

To qualify for a LoanBuilder loan, you need to have:

  • Minimum $42,000 in annual revenue
  • Minimum personal credit score of 550
  • At least 9 months in business
  1. Accion

Accion is a nonprofit lender that tailors its offerings to business owners with lower credit scores.

Funding is available from as little as $300 up to $1 million. Interest rates can be higher than when compared to other lenders, ranging from 7% and 34%.

What You Need to Apply for Accion

Accion’s documentation requirements vary from applicant to applicant, but may include items such as:

  • Tax returns
  • Bank account balances
  • Business plan

How to Qualify for Accion

Accion has lower minimum requirements than other lenders, mostly due to their nonprofit nature. Requirements vary by geographic location, but include:

  • A minimum credit score of 575 (550 in some areas)
  • Sufficient cash flow to cover the payments on your loan

Small Business Funding Success Stories

While funding for small businesses and startups can be difficult, many business owners find creative ways to fund their businesses and seek success.

Here are the stories of how three small businesses found funding:

Fairway Auto Care Center & Fairway Business Advisors

Fairway Auto Care Center CEO Jeff Rasmussen needed extra cash to make a down payment, but didn’t have enough liquid personal assets to cover the cost.

He secured a bank loan and a SBA loan, as well as using a ROBS (rollover as a business startup) to fund the down payment. A ROBS is a profit-sharing plan that then purchases the assets or stock of the business as one of its investments.

Thanks to this unique combination of funding, Fairway Auto Care Center has been in business for a decade.

Page One Consultants

When beginning her engineering and construction consulting firm in 1993, Page One President and CEO Sheryl Page faced challenges funding her company in a male-dominated industry.

In the early years, she used as many as 15 credit cards to keep the business afloat. Then, in 2001 the company received a $250,000 7(a) SBA guaranteed loan to help cover expenses.

With that funding, Page One was able to secure more high-paying clients and repay the loan.

GreenPal

Attempting to get GreenPal off the ground, Zach Page and his co-founders were turned down by more than 40 investors.

Thanks to Page’s solid personal credit, the company received an unsecured line of credit for $85,000 for the business. To get through the first year, GreenPal used the entire line of credit and three cash advances on his personal credit card.

The company paid off the loan in its second year and, in its third year was on track to surpass $3 million in annual revenue.

Secure the Funding Your Small Business Needs to Grow!

With all the lenders out there, it can be overwhelming to begin looking for a small business loan.

At The Credit Review, we’ve collected all the best small business lenders in the business, allowing you to compare and contrast terms, interest rates, customer reviews, and more. Find your match today.

How can small business financing help me?

Small business financing can assist business owners with a variety of problems, including a lack of cash flow, paying for expenses and equipment, expanding the business, and more.