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Bootstrapping Your Business? Consider These Other Funding Options Instead

Published By Janet Gershen-Siegel at March 7th, 2018

Have you got a brand-new business? It can seem like a money pit at times, can’t it? While that is a fairly common issue with new business owners, it does not have to be that way. You don’t have to lose your savings bootstrapping your business.

You should expect to put some of your own money into a new business, but that should not be the sole place you turn for funding. In order to help you out, here are some other ways of funding your new company which don’t involve rummaging through your couch cushions, looking for loose change.

Bootstrapping Your Business? Try Angel Investors and Venture Capitalists

bootstrapping your business Credit Suite2 - Bootstrapping Your Business? Consider These Other Funding Options InsteadThese are not quite the same thing. An angel investor will typically invest in early-stage or startup companies in exchange for a 20 – 25% return on their investment. 

Venture capitalists will give money to help build new startups which the VCs believe have both high-growth and high-risk potential. These can be fast-growth companies with an exit strategy already in place, and they can get up to tens of millions of dollars for investment, networking, and growing their company. Basically, this is a gamble on future earnings. 

Also, venture capitalists will often look to recover their investment within a 3-5 year time frame. They will also, often, want to own a piece of your company if not a controlling stake, so be aware of that.

Bootstrapping Your Business? What About Crowdfunding?

You might want to try a service like Kickstarter. However, make sure you read the fine print, as many crowdfunding platforms will require that you give all of the funding back if you do not make your goal by the end of the crowdfunding campaign (Indiegogo has a flexible funding option). Also, crowdfunding platforms will take a percentage of the donations, and they generally will push to have you deliver on your promises. So, you’ll have to actually manufacture that electric spaghetti twirler or anything else your business is supposed to be doing.

Donors can become weary of crowdfunding pitches, and straightforward businesses might not do so well. Crowdfunding tends to work best for situations where the donors can personally connect with the product or service, so products which aren’t quite on the shelves yet, or artistic endeavors, can do well. But standard widgets which are not going to really change are not going to attract brand ambassadors and, by extension, they probably won’t get donors too fired up.

Got Invoices? Then Try Factoring

Another option is invoice factoring, where your company gets a percentage of the money from outstanding invoices fronted by the factoring company. The factoring company then goes directly after any company which owed you money, and collects on it themselves. Hence if a retailer owes your manufacturing company $1,000 on a twelve-month payment basis, you might hand that invoice over to the factoring company in order to get something like $950 in a week. The factoring company would then collect the full amount from the retailer. This allows you to extend credit or negotiate longer-term payment plans in exchange for other, more favorable terms (such as getting a retailer on board with your new manufacturing company) without holding a bunch of what are essentially IOUs for months at a time.

How About Turning to the Small Business Administration?

There is also the SBA, which has various CAPLines loan programs and SBA Express. They do not provide the loans; rather, the SBA sets loan guidelines. It’s their lending partners who actually make the loans. The SBA also offers research grants if your company engages in scientific research and development.

Don’t Need a Lot of Money? Then Look into Microloans

If you are bootstrapping your business, it’s possible you don’t need a lot of cash.

Another option is the microloan, which you can’t even get from a regular lender. Instead, you get a microloan from a microlender. Try the Association for Enterprise Opportunity to find a local microlender. A microloan is exactly what it sounds like; it’s not a lot of money. Still, if your business only needs something like $500 – $35,000, then a microloan could fill the bill.

Bootstrapping Your Business?  Consider Bank Loans

Need more than a microloan? Then apply for a bank loan for your business. Be prepared to put up collateral, which could be inventory or real estate or the like. Loans must be paid back on time or else your business’s credit score will suffer.

Bootstrapping Your Business? Use Business Credit Cards

One more is business credit cards. However, be aware that business credit cards must be paid off just like personal credit cards. A high credit utilization rate (the amount of credit you use as divided by the total amount of credit available to your company) of over 30% can bring down your business credit scores and make it harder to borrow money or get another business credit card, so you need to be vigilant with these and pay them off as soon as is practical.

Bootstrapping Your Business? Start Building Business Credit

Business credit is credit in a small business’s name. It doesn’t attach to an entrepreneur’s personal credit, not even when the owner is a sole proprietor and the only employee of the business. 

Because of this, an entrepreneur’s business and personal credit scores can be very different.

The Advantages

Due to the fact that small business credit is separate from consumer, it helps to safeguard your personal assets, in the event of legal action or business bankruptcy.

Also, with two distinct credit scores, an entrepreneur can get two different cards from the same vendor. This effectively doubles buying power.

Another advantage is that even startup businesses can do this. Visiting a bank for a business loan can be a recipe for frustration. But building business credit, when done right, is a plan for success.

Personal credit scores depend on payments but also various other factors like credit usage percentages. 

But for company credit, the scores truly only depend on whether a company pays its bills on a timely basis.

The Process

Establishing small business credit is a process. It does not occur automatically. A small business must proactively work to establish company credit. 

However, it can be done easily and quickly, and it is much swifter than building consumer credit scores. 

Merchants are a big aspect of this process.

Undertaking the steps out of sequence leads to repetitive rejections. Nobody can start at the top with company credit. For instance, you can’t start with retail or cash credit from your bank. If you do, you’ll get a denial 100% of the time.

Company Fundability

A business has to be fundable to lending institutions and vendors. You should be building fundability even if you are bootstrapping your business.

For that reason, a company needs a professional-looking website and e-mail address. And it needs to have site hosting bought from a company like GoDaddy. 

And, company telephone and fax numbers need to have a listing on 411. You can do that here: http://www.listyourself.net

In addition, the business telephone number should be toll-free (800 exchange or comparable).

A company also needs a bank account dedicated only to it, and it has to have every one of the licenses essential for running. 

Licenses

These licenses all must be in the perfect, correct name of the small business. And they must have the same small business address and phone numbers. 

So, bear in mind, that this means not just state licenses, but possibly also city licenses.

bootstrapping your business Credit Suite3 - Bootstrapping Your Business? Consider These Other Funding Options Instead

Learn more here and get started with building business credit with your company’s EIN and not your SSN.

Dealing with the IRS

Visit the IRS web site and get an EIN for the business. They’re free. Pick a business entity like corporation, LLC, etc. 

A business may get started as a sole proprietor. But they absolutely need to switch to a type of corporation or an LLC. 

This is to reduce risk. And it will make the most of tax benefits.

A business entity matters when it comes to taxes and liability in the event of a lawsuit. A sole proprietorship means the owner is it when it comes to liability and tax obligations. Nobody else is responsible.

The best thing to do is to incorporate. You should only look at a DBA as an interim step on the way to incorporation. Even while you are bootstrapping your business, get this done.

Kicking Off the Business Credit Reporting Process

Start at the D&B website and get a cost-free D-U-N-S number. A D-U-N-S number is how D&B gets a business into their system, to generate a PAYDEX score. If there is no D-U-N-S number, then there is no record and no PAYDEX score.

Once in D&B’s system, search Equifax and Experian’s web sites for the company. You can do this at www.creditsuite.com/reports. If there is a record with them, check it for correctness and completeness. If there are no records with them, go to the next step in the process. 

In this way, Experian and Equifax have activity to report on.

Vendor Credit Tier

First you need to build trade lines that report. This is also referred to as the vendor credit tier. Then you’ll have an established credit profile, and you’ll get a business credit score. 

And with an established business credit profile and score you can begin to get credit in the retail and cash credit tiers.

These varieties of accounts often tend to be for the things bought all the time, like marketing materials, shipping boxes, outdoor workwear, ink and toner, and office furniture.

But to start with, what is trade credit? These trade lines are credit issuers who give you starter credit when you have none now. Terms are typically Net 30, rather than revolving. 

Therefore, if you get an approval for $1,000 in vendor credit and use all of it, you must pay that money back in a set term, such as within 30 days on a Net 30 account.

You want 5 to 8 of these to move onto the next step, which is the retail credit tier. But you may need to apply more than one time to these vendors. So, this is to validate you are trustworthy and pay promptly. Here are some stellar choices from us: https://www.creditsuite.com/blog/5-vendor-accounts-that-build-your-business-credit/ 

Retail Credit Tier

Once there are 5 to 8 or more vendor trade accounts reporting to at least one of the CRAs, then move to the retail credit tier. These are businesses such as Office Depot and Staples. 

Just use your SSN and date of birth on these applications for verification purposes. For credit checks and guarantees, use the company’s EIN on these credit applications.

One such example is Lowe’s. They report to D&B, Equifax and Business Experian. They want to see a D-U-N-S and a PAYDEX score of 78 or more.

Fleet Credit Tier

Are there 8 to 10 accounts reporting? Then progress to the fleet credit tier. These are companies such as BP and Conoco. Use this credit to buy fuel, and to fix, and take care of vehicles. Only use your SSN and date of birth on these applications for verification purposes. For credit checks and guarantees, make sure to apply using the small business’s EIN.

One such example is Shell. They report to D&B and Business Experian. They need to see a PAYDEX Score of 78 or better and a 411 company phone listing. 

Shell might say they want a particular amount of time in business or revenue. But if you already have adequate vendor accounts, that won’t be necessary. And you can still get approval. It’s a lot better than bootstrapping your business.

bootstrapping your business Credit Suite3 - Bootstrapping Your Business? Consider These Other Funding Options Instead

Learn more here and get started with building business credit with your company’s EIN and not your SSN.

Cash Credit Tier

Have you been responsibly handling the credit you’ve up to this point? Then move to the cash credit tier. These are service providers such as Visa and MasterCard. Just use your Social Security Number and date of birth on these applications for verification purposes. For credit checks and guarantees, use your EIN instead.

One example is the Fuelman MasterCard. They report to D&B and Equifax Business. They want to see a PAYDEX Score of 78 or better. And they also want you to have 10 trade lines reporting on your D&B report. 

Plus, they want to see a $10,000 high credit limit reporting on your D&B report (other account reporting).

Plus, they want you to have an established business.

These are companies such as Walmart and Dell, and also Home Depot, BP, and Racetrac. These are commonly MasterCard credit cards. If you have 14 trade accounts reporting, then these are attainable.

Monitor Your Business Credit

Know what is happening with your credit. Make certain it is being reported and address any inaccuracies as soon as possible. Get in the habit of checking credit reports and digging into the particulars, and not just the scores.

We can help you monitor business credit at Experian and D&B for only $24/month. See: www.creditsuite.com/monitoring

At Equifax, you can monitor your account at: www.equifax.com/business/business-credit-monitor-small-business.

Update Your Record

Update the relevant information if there are errors or the info is incomplete. At D&B, you can do this at: https://iupdate.dnb.com/iUpdate/viewiUpdateHome.htm. For Experian, go here: www.experian.com/small-business/business-credit-information.jsp. So, for Equifax, go here: www.equifax.com/business/small-business.

Fix Your Business Credit

So, what’s all this monitoring for? It’s to challenge any errors in your records. Errors in your credit report(s) can be taken care of. But the CRAs typically want you to dispute in a particular way.

Get your company’s PAYDEX report at: www.dnb.com/about-us/our-data.html. Get your company’s Experian report at: www.businesscreditfacts.com/pdp.aspx?pg=SearchForm. And get your Equifax business credit report at: www.equifax.com/business/credit-information.

Disputes

Disputing credit report mistakes typically means you mail a paper letter with duplicates of any evidence of payment with it. These are documents like receipts and cancelled checks. Never mail the original copies. Always send copies and retain the originals.

Fixing credit report errors also means you precisely detail any charges you dispute. Make your dispute letter as understandable as possible. Be specific about the problems with your report. Use certified mail to have proof that you mailed in your dispute.

Dispute your or your company’s Equifax report by following the directions here: www.equifax.com/small-business-faqs/#Dispute-FAQs

You can dispute mistakes on your or your business’s Experian report by following the directions here: www.experian.com/small-business/business-credit-information.jsp

And D&B’s PAYDEX Customer Service telephone number is here: www.dandb.com/glossary/paydex.

A Word about Building Business Credit

Always use credit smartly! Never borrow more than what you can pay back. Track balances and deadlines for payments. Paying in a timely manner and completely does more to boost business credit scores than just about anything else.

Establishing small business credit pays. Good business credit scores help a small business get loans. Your lender knows the small business can pay its debts. They recognize the business is bona fide. 

The small business’s EIN links to high scores and credit issuers won’t feel the need to call for a personal guarantee. You won’t have to lose your savings bootstrapping your business.

bootstrapping your business Credit Suite3 - Bootstrapping Your Business? Consider These Other Funding Options Instead

Learn more here and get started with building business credit with your company’s EIN and not your SSN.

Upshot

Leave the change in the couch cushions for another day and get your business financed the right way. Yes. You can stop bootstrapping your business.

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