Everything You Need to Know About Business Funding that You Didn’t Learn in Kindergarten

Whether you are a new entrepreneur or a seasoned business owner, there are likely things you do not know about business funding.  What are your options? How do you get it? What is the best option for you? 

These are not easy questions to answer.  There are a lot of variables, and it can take some time to figure things out.  Don’t worry though. We’ve got you covered. We are going to take you back to school and cover everything you need to know about business funding. 

A is for Application Ready

Not all business funding is a form of debt.  The vast majority however, is. Crowdfunding, grants, and independent wealth are pretty much the only exceptions.  For this reason, it is vitally important to be certain your business is application ready. That means having a stellar credit score, all documents prepped and ready, and collateral available. 

Discover our business credit and finance guide, jam-packed with new ways to finance your business without emptying your wallet.

You can’t do it overnight, but there is never a better time to start than right now. It may take some prep work that you have thought about.  For example, did you know that for your business to appear fundable to lenders, it is important to have separate contact information, an EIN, a D-U-N-S number, and even to have a professional, user friendly website? 

Not only are these things important for appearing fundable, but they are necessary to start building business credit.  Business credit is important. Here’s why. Most of the time personal credit cannot handle the spending necessary to run a business.  If you try to run a business solely on the merits of your personal credit, you could end up destroying your personal credit score even if you make every payment on time. 

How to Make Your Business Appear Fundable 

Get Incorporated

It is important to incorporate.  You have a few options. The one you choose will depend on your budget and the level of liability protection you need.

• C Corp

This is the most complicated and expensive option.  Before you choose it, be sure there are other reasons.  The other options work fine for business fundability.

• S Corp

This option basically offers the same separation as the C Corp, but taxes are paid at the personal level, rather than requiring the business to be taxed as well. It is also cheaper than incorporating as a C Corp.  If you aren’t required to file as a C corp, this is a good alternative. 

• LLC

Forming a Limited Liability Corporation results in less liability as well.  It also offers enough separation to serve the purpose of establishing business fundability.  If you are not required to be a C Corp or S Corp, this is the easiest and most cost-effective way to go.

Get an EIN

You need to apply for an EIN.  It acts like your SSN, but for your business.  It allows you to apply for business funding without using your SSN in some cases.  

The process for applying for and EIN is easy.  The IRS has an online form, and as soon as all the information is verified you receive your number.  It typically happens almost immediately. 

You Need a D-U-N-S Number

Dun and Bradstreet (D&B) is the most business credit reporting agency that is most commonly used.  They issue each business on file a 9-digit D-U-N-S number. Application is easy and free. This is essential to building business credit, which is necessary to be application ready.

Separate Contact Information

As already mentioned, your business needs its own phone number.  This way, when you apply for credit, you can enter contact information that is separate from your own.  When information is reported to agencies, sometimes the phone number is an identifying factor. This is just another way for lenders to see your business as a separate, fundable entity.  Some non-traditional lenders and credit cards require you to have a business number listed in the directories as part of the approval process. 

Along with a separate phone number, your business needs it own physical address and email address. 

Discover our business credit and finance guide, jam-packed with new ways to finance your business without emptying your wallet.

If You Aren’t Online, Are You Even a Business? 

In today’s business world, you absolutely must have a website.  You can’t just throw one together though. A poorly put together website is just as bad as no website, if not worse.  Go ahead and spring for someone who knows what they are doing. It needs to be professional. Pay for hosting too. A free hosting service will not cut it.  Remember your business email needs to have the same URL as the website, so a free email service such as Yahoo or Gmail is no go as well. 

Business Bank Account

Get your business its own bank account.  It will help your business appear fundable when applying for business funding, but it will also help keep personal and business expenses separate for tax purposes.  In addition, some business credit cards and tradelines like to see a certain balance in a dedicated business bank account.

Establish Credit Lines with Vendors

New businesses just getting started should  look for vendors that will extend credit and report to the top credit agencies.  

If you have been around for a while and do not have credit with your existing vendors, ask for it.  If they comply, ask if they currently report to the credit agencies, or if they will. Not all vendors do because it is not required, and not all are willing.  If your current vendors do not want to cooperate in this endeavor, consider switching to vendors that will. 

Talk to the Utility Companies

Sometimes utility companies are willing to report payments to credit agencies, which can help you build business credit for applications as well.  That’s just one more step to appearing fundable. When the time comes to apply for business funding, you’ll be ready.

B is for the Best Options for Your Business Funding

There are so many options for business funding available it can be completely overwhelming to determine which ones are best for your business.  The best one may even change from circumstance to circumstance. Variables such as why you need the funds and your businesses’ ability to qualify for funds all make a difference. Here is a quick rundown of what is out there. 

Traditional Loans

These are the loans that you go to the bank to get.  As a business, your business credit score can help you get some types of funding even if your personal score isn’t awesome.  That isn’t necessarily the case with this type of funding however. 

With a traditional lender term loan, you are almost always going to have to give a personal guarantee.  This means they will check your personal credit. If your personal credit score isn’t in order, you will likely not get approval.

What kind of personal credit score do you need to have in order to qualify for a traditional term loan? If you have at least a 750 you are in pretty good shape. Sometimes you can get approval with a score of 700+, but the terms will not be as favorable. 

If you have really great business credit, your lender might be more inclined to be a little more flexible. However, your personal credit score will still weigh heavily on the terms and interest rate. 

Of all of the available business funding options, this is the hardest to get. It is usually worth the trouble though if possible, because it often has the best rates and terms. 

Non-Traditional Lenders

These are private lenders. Usually they operate online.   The difference between these and traditional lenders is that the loans have looser approval requirement and a much faster application process. Most often you can simply apply online.  Most offer approval in as little as 24 hours, and the funds are in your account within 24 to 48 hours after that. 

These are an option if your personal credit isn’t terrible and you need funding fast. 

Lines of Credit

Lines of credit are basically the traditional lender’s version of a business credit card. It’s revolving credit.  That means you only pay back what you use, just like a credit card. Rates are typically much better than a credit card however.  The application and approval process is similar to that of a traditional term loan. 

If you need revolving credit and can qualify for a term loan, this is the best of the available business funding types for you. It is great for bridging cash gaps and covering short term expenses without high credit card interest rates. 

The lack of loyalty points and rewards however, makes some business owners prefer credit cards despite higher interest rates.

Invoice Financing

If you are an established business with accounts receivable, invoice factoring is one of the available business funding types that you have access to. This is where a factoring company advances you funds based on your invoice quality.  When you collect, you pay them a factoring fee. You get cash right away without waiting for your customers to pay the invoices.

This is a good option if you need cash fast, or you do not qualify for other business funding options. The interest rate varies based on the age of the receivables.

Crowdfunding

Crowdfunding is a newer option for finding investors. With crowdfunding, you can literally have a crowd of investors fund your business $5 and $10 at the time. 

There are many crowdfunding sites, but the most popular are Kickstarter and Indiegogo. They are similar, but there are some important differences. The most obvious is the timing of when you actually receive the funds that others invest in your company.

There are other crowdfunding sites out there as well. Different ones work better for certain businesses than others. Do some research. Keep in mind your type of business and the specific business each one appeals too. 

Credit Cards

These get a bad rap, but they can actually be a good option. They are available much more readily, even with a poor credit score.   Lower the credit scores get higher interest rates however, and there are limits on how low they will go with a credit score. 

This is one funding types that most of the general public are eligible for at any given time.  The downside is that they typically have a high interest rate. The upside is that many of them offer rewards in the form of cash or points that can be helpful. 

Grants

There are not a lot of grants for businesses out there.  Typically, they are offered by professional organizations. There are some government grants available also. Competition can be fierce, but they are definitely worth a shot if you think you may qualify. 

Requirements vary from grant to grant.  Most are only awarded to a certain number of recipients.  They are worth looking into if you fall into one of these basic categories. 

• Women owned business

• Minority owned business

• Businesses run by veterans

• Businesses in low income areas

 There are also some corporations that offer grants in a contest format that do not require much other than that you meet the corporation’s definition of a small business and win the contest. 

Discover our business credit and finance guide, jam-packed with new ways to finance your business without emptying your wallet.

C is for Connection

When it comes to business funding, everything it connected.  Sometimes things that you never even think about can affect your ability to get funding.  For example, if you are applying for funding from the same bank that holds your business account, they are going to have access to that account activity.  They will be able to see if your account continually goes into the red. Something like that could throw a red flag. If you habitually bounce checks on your personal account, they may see that too. 

Imagine if you were the recipient of a business grant.  Now imagine you are asking a lender for funding. It is likely they will be able to find out through social media or some other means that you were the recipient of the grant.   They may ask you how you used the funds and what you have to show for it. If you cannot show that you managed grant funds in a profitable way, they are going to be less likely to award you with business funding from their institution. 

Even things such as your business’s online reputation can affect your ability to get funding.  If a lender happens to check the business social media and takes note of bad reviews, that will not be a good thing.

Consider These ABCs before You Need Business Funding

While you may not be sure what the best funding options are for your business until a specific need arises, you can definitely work on being application ready and recognizing potential connections on a continual basis.  Doing so now will likely make getting business funding much less of a hassle when the time comes.