Small businesses often begin with a dream and a desire to see it through. Entrepreneurs see some type of need and a way to make it happen. Next comes the business plan, the road map to success. How will the business be structured? How many employees are needed? What equipment needs to be purchased? What inventory needs to be on hand? Equally important in this planning stage is answering the question: How will this dream be financed? Will the business use traditional financing or alternative financing?
What is Business Credit?
Part of that early process is establishing business credit. Business credit is the ability to borrow money to finance the needs of the business. This is critical not only for starting a new business but also for the business to grow in the future.
A key component is establishing a business credit profile. Businesses can begin to form an “identity” as that entity. This is much like a credit score for a consumer.
By applying for loans or credit cards, a new business will begin to form the trust with lenders that any credit extended will be repaid.
Types of Business Loans
Many loans are available to businesses, depending on their needs. Part of managing the business credit profile is determining the right type of financing.
- A short term loan can solve an immediate, specific problem
- Lines of credit allow the business to access funds as needed
- Equipment financing will fund new purchases
- Loans based on credit card sales or receivables keep the business operations moving
It can be hard for a newly formed business to know what type of loan is appropriate. The business owner should find a lender that can help guide the process and make recommendations.
Common Errors in Business Credit
Unfortunately, sometimes new business make mistakes that can end up damaging their business credit score. This will make it difficult to obtain new loans in the future, especially if the business begins to have problems.
Common errors include:
Late payments or missing payments on loans or credit cards. This is a red flag to lenders that the business is struggling.
Maxing out credit cards or lines of credit. This is an indicator that the business is having cash flow problems and needing to rely too heavily on credit.
Not using credit available. On the flip side, if credit is not used, there is no history of repayment to show a lender.
If these errors become apparent in the business credit profile, it can be hard for a newly formed business to recover and prove to lenders that new credit should be extended.
Cash Flow Problems for New Businesses
As a new business is starting, cash flow can often be an issue. Expenses related to the business are incurred much faster than income. The business may need to buy inventory or pay employees before the business is operating at full capacity.
Having access to credit can mean the difference between success and failure. A loan can float a business in the months where sales may fall short.
A business owner can go to a bank and request a loan when cash flow becomes an issue. The request for a loan to help with cash flow will need to be approved. However, one of the most common questions during the approval process is: can this loan be repaid?
If the business is having cash flow issues, this question becomes difficult to answer. Lenders will need to predict that the business can “turn it around” and make payments in the future.
If the lender is convinced that the loan will indeed help the business get through the cash flow issues, then the loan may be approved. If not, the loan may be denied, leaving the business to continue to struggle.
At that point, it may only be a matter of time before existing loans appear on the lender’s list of past-due loans.
Impacts of COVID-19 on Small Businesses
COVID-19 hit many small businesses hard. With many states enforcing some type of shut down, businesses found that they could not deliver their products or services to consumers.
Even as reopening has occurred, returning to pre-COVID levels is still a challenge for many small businesses. If these businesses did not have access to business credit previously, they found themselves scrambling for access to funds.
The passage of the Paycheck Protection Program provided access to loans for small businesses to cover their payroll. However, the first round of funds ran out in 6 days, and the second round of funding closed for applications on August 8th, 2020.
As COVID-19 continues to impact the economy, businesses are finding that they need to turn to other sources for financing to survive. Even for those that were able to obtain PPP loans, the effect on their business may have been only short-term.
Barriers in Traditional Financing
As these businesses seek out loans, they may hit a brick wall with traditional banks. Why? Because as mentioned, loan approvals consider cash flow and an existing business credit profile.
Well established businesses with long-term relationships with their lenders may have no problem obtaining a loan to help them weather the storm. But many small to mid-sized businesses may not be in this position.
Additionally, traditional lenders may be slow to approve loans or make the funds available. At this crucial time, a quick turnaround is essential.
Alternative Financing May Be the Answer
With limitations in what traditional lenders can offer, alternative financing may be the solution. Lenders in this arena can approve loans quickly, often with fewer documentation and collateral requirements.
Inspyre Funding has a mission to provide loans to small and mid-sized businesses, even those that may have a limited history or troubled credit.
Do you run a small business and need access to a loan in order to thrive? Apply for a loan today and let a funding advisor help you find the right loan to meet your needs.