Published By Credit Suite at November 30th, 2015
The SBA has a great loan program called The Microloan Program. Although the name is Micro, the benefits to you can be huge. So, consider micro money for your business.
The Microloan Program provides small, short-term loans to small businesses. Micro loans can provide you working capital and fulfill other purposes when you need money the most.
Some of the common uses for Micro loans include:
Terms, Interest Rates, and Fees and loan terms vary. So this is based on the size of the loan, and the planned use of funds. And it is also from the requirements of the intermediary lender, and the needs of the small business borrower.
Whether you just need micro money or a lot more, your business has got to be fundable.
So, what does it mean when we talk about fundability? What does it mean when we state a business is fundable? This fundable interpretation should get you thinking of your corporation – and corporate credit in a whole new light.
Let’s get that fundable definition out of the way from the very start.
Fundable: of or capable of being funded; deserving of being funded.
Yet what is the fundable definition in our context?
Here, the fundable definition is just a little bit different.
Being fundable likewise implies – able to be funded by a lender or a credit provider.
So here, we are looking more at what credit issuers and lenders wish to see. But let’s step back for a moment.
You’re a company owner. And like every other company owner, since the beginning of time, your business needs cash. This is the case even if you just need micro money.
But lenders and credit providers aren’t simply going to hand over cash. Instead, they want to see if your company is a good credit risk. They want to know that you can pay them back.
Complicating matters is the problem of fraud. Per a 2009 Experian report, “fraud-related costs for U. S. businesses are more than $50 billion annually. This figure may understate the extent of the problem, as estimates show that up to 30 percent of all bad-debt commercial losses are due to ‘soft’ fraud, which primarily occurs from material misrepresentation on an application. Combined with the fact that business fraud is estimated to be three to 10 times more profitable than consumer fraud, business fraud has become a growing concern for organizations.”
As a result of so much fraud, lenders and credit providers examine credit applications extremely thoroughly.
Basically, they are looking for all kinds of methods to tell you and your company no when you come to them for money. Their fundable definition includes the component of fitting their requirements for not being fraudsters. For banks and the like, business legitimacy makes all the difference in the world. No legitimacy, then no funds. It’s that simple.
As a result of their careful checks for fraud, lenders and credit providers are looking at several different aspects of your credit or loan application. They are taking a look at various elements of your firm, as well, and even at aspects of you, the owner’s existence.
Your goal is to alleviate their concerns of scams. And the way in which you do this is by removing every reason they could point to, to possibly say no to offering you cash.
Fundability begins with recognizing what lenders and credit providers are seeking. Then we’ll have a look at exactly how to most effectively achieve and supply what they want.
Fundability all starts with your industry.
Some industries are believed to be high risk or restricted. These industries, necessarily, are most likely to have a more difficult time getting financing of any type.
Usually, restricted and high risk industries have some things in common. There might be high risks of injury at work. Or the industry might engage in a lot of cash transactions. This holds true no matter the safety record of a particular corporation, or the majority of its transaction types.
This is the principle of congruency, and it is going to turn up again and again. The business credit reporting bureaus and lenders will analyze your company diligently. Among the major ways they do this is by strictly looking for matching records.
Because of this, if your records do not all match, it will turn up as if they are missing. Missing records will trigger a denial, as a loan provider will presume fraud on its face.
Therefore, it is vital to make sure that every record, anywhere, is identical.
It goes beyond your industry. It’s also your corporate name, address, phone and fax numbers – everything! These must look the same all over, such as in IRS records; your firm’s records with Dun & Bradstreet, Experian, and Equifax; all licenses needed to run your corporation; and incorporation documents.
Copy/paste this information; do not chance it with retyping.
You can be imaginative when naming your company.
Beyond crafting the best remarkable name which is simple to spell and say, and evokes your company’s mission statement, there’s also the matter of risk. Including a risky business type in your company name will cause financing denials.
There is nothing misleading, unlawful, or underhanded in keeping the name of a high risk or restricted industry out of your corporate name.
Congruency counts here, too. Your listed business ownership must be identical any place you provide it.
It is best practices to maintain a record of every place where your corporation has a listing.
A professional web site is a must. A small business needs a professional-looking website. And it must have site hosting from a provider like GoDaddy. Don’t use Weebly or Wix. It needs to be your domain, not domain.wix.com. Use Upwork to employ people who can help you get set up. Get a professional logo from Fiverr.
Take a look at the more successful competitors in your industry. What do they include? What do they omit? And what do they highlight?
You do not need to copy another site, and it isn’t in your best interests to do so, anyway. But do not hesitate to crib from a few of their better concepts. If those ideas help them, then they could benefit you, too.
Just like on the records of the business, you need to display the owners of your corporation. Clients and leads want to know who they’re dealing with.
And do not forget to include your About Us web page on your list of locations with business details which must be consistent.
Congruency is a requirement here too.
It’s the exclamation point in Yahoo! or the like. Don’t do this, if you can at all help it.
There are going to be people typing your company name right into browser address bars. By adding special characters, you have just made it harder for them to do that.
Is it better to place the name of your industry into your company name, or not?
Don’t place the name of a high risk or restricted industry in your business name! There is absolutely nothing deceptive or misleading about this.
Is your company name available in your state? Check your name with your Secretary of State. This is because they might require that a business name be unique.
Any web site must be searchable.
Because if you make your customers and prospects go to another website, they might not return.
A corporate address must be a real brick and mortar building. It must be a deliverable physical address. This can never be a home address or a PO Box. Do not use UPS mailing addresses. Some lenders will not approve and fund unless this criterion is met.
A PO Box PBSA stands for a PO Box Post Box Street Address. Micro money lenders and credit providers understand that these are really post office boxes. They will see these as being non-legitimate ‘addresses’, just like post office boxes.
Many entrepreneurs, especially startup owners, do not have the money for actual office space. But loan providers check USPS and places like Google Maps to see if you’re using a home address. If you are, you often get an immediate decline. Never use a home address on your application. Even if your firm is only you.
Fortunately, the good news is, virtual offices are available in all states and numerous cities.
Your virtual office, ideally, must be in the same state where your business is incorporated. And in the same vein as the caution against a PBSA, you need a real physical address versus a mailing address.
Your corporation must have its very own phone number. Do not give a personal cell or residential phone as a company phone number. But VOIP (voice over internet protocol) is fine.
Additionally, your corporate telephone number must be toll-free. This is 800 exchange or such.
Again, congruency is an absolute requirement.
A cell number or home telephone number as your primary business line can get you flagged as un-established. Your corporate number must only be used for your corporation. It must not be an additional line for your family to use.
Your voicemail greeting should, at an outright minimum, tell the client who they have reached and when you can return their phone call.
You must list your corporate phone number on 411. You can do so on http://www.listyourself.net.
Your phone number must have a 411 listing for the majority of credit issuers, lenders, vendors, and even insurance providers to approve you. Check your document to see if you’re listed. Ascertain your info is accurate.
As always, congruency is necessary here.
The amount of time you have been in business is, naturally, a sign of integrity and therefore fundability to lenders and credit issuers.
But what is the day when a corporation starts? It’s the day of incorporation. This is one reason why, the quicker you incorporate, the better.
Does your business have all of its required licenses to operate in your industry and location? When did you get your licenses? A lender or credit provider will not consider your corporation to really be in business if you’re missing crucial licenses. The faster you get licensing, the better.
With no license to operate in your industry, your ability to attain fundability is cut off at the knees. The lender or credit provider will feel it’s more important to protect the public than to give you money.
An important piece of the fundability puzzle is having a separate business bank account. You need a business bank account, to keep funds separate from your personal accounts. Commingling personal and corporate funds and expenses is a recipe for an audit from the IRS. The simplest way to keep these two universes separate is to have separate bank accounts.
The date you open your business bank account is an essential one in the life of your corporation. The account opening date is the business’s opening date, far as lenders are concerned. A longer history is better.
It’s also the business’s opening date, so far as the business CRAs see it.
To open a business bank account, the business owner must submit documentation, like business registration paperwork. It can often (though not always) include proof of having an EIN.
A business bank account lists both the owner and the business. Such accounts may require a certain minimum balance to avoid maintenance fees. Fees in general tend to be higher than those for personal business bank accounts.
Congruency is a requirement here, too.
Banks keep credit scores which help them determine whether to lend your company cash. Essentially, these are unbiased measures of fundability, per the lender. In part, these ratings are based upon the historic actions of you with reference to your company bank account.
A rating of Low-5 is typically believed to be the minimum rating for getting funding.
Possibly the easiest way to achieve and maintain a fantastic bank credit score is to deposit a minimum of $10,000 into your business bank account and keep it there for as long as three months. On top of that, make consistent deposits.
These activities will assist in three ways. One, you will have kept an excellent minimum balance for a minimum of three months. Two, you will probably not overdraw with such a superb balance. And three, you will be at the magic minimum for a Low-5 bank credit rating.
Writing checks with not enough funds (NSFs), or going into the red are surefire ways to spoil your bank rating. You might not even get micro money.
By maintaining a minimum balance of $10,000 on a consistent basis, you will, for the most part, make NSFs and negative balances a distant memory.
A business entity defines issues of liability, and it makes a difference when it comes to taxes.
The best business entity for fundability is a corporation.
Corporations are legally distinct from their owners. Whether you pick a C-corporation, an S-corporation, or an LLC is your choice. Talk with a lawyer or a seasoned tax specialist to determine which is the best possible choice for you.
A sole proprietorship means the business owner is it when it concerns liability and tax obligations. No one else is responsible.
Any complete company name must include any recorded DBA filing you use. This is a necessity for records congruency.
But no matter what, if you run a small business as a sole proprietor, the best thing to do is to incorporate. If you have already filed a DBA, you will still have to move onto a corporate business entity. You should just look at a DBA as an interim step on the way to incorporation.
Check with your Secretary of State to guarantee they have all the needed info for your corporation. Make sure that you are in good standing with them, and that your entity is active. You must submit annual reports and pay a fee yearly to remain active.
A foreign LLC is a limited liability corporation formed in one state but registered in another state. It isn’t an LLC formed outside of the USA. A distinct registration is necessary because the laws between the states vary.
If your corporation does business outside of your state, it will reinforce fundability to foreign file.
A corporation will also need to pick a registered agent that they indicate on the Articles of Incorporation. A registered agent receives service of process and legal and tax papers on behalf of the corporation.
Congruency is necessary here, too.
If you purchased your company from another person, when was that? It will count toward time in business. The longer, the more fundable your corporation is.
Go To the IRS website and get a free EIN for your company. This is also where you choose a business entity like corporation, LLC, etc
To open a business bank account, you need an EIN, so get this out of the way first. The IRS has a form for everything, including getting an EIN, the Federal tax ID number. This is form SS-4. When you have filled it out, either mail or fax it to the appropriate office. The form has this information.
You must get your EIN ASAP, so you have it for filing tax returns and making bank deposits. Per the IRS, if you do not have an EIN by the time your business tax return is due, write ‘Applied For’ and the application date in the space where you’re supposed to add the EIN. Do not put your Social Security Number there.
Being behind in filing your taxes will not do your business any favors regarding fundability.
Congruency is a requirement here, as in all other areas.
Your corporate e-mail must be on the exact same domain as your company. Do not use generic free email services likes Gmail, yahoo, or msn.
As everywhere else, congruency is a necessity for e-mail records.
A corporation must have all of the licenses necessary for running.
These licenses all must be in the perfect, exact name of the business. And they must have the exact same company address and telephone numbers.
This means not just state licenses, but possibly also city licenses. Check with your Secretary of State’s office.
Congruency is a requirement here, too.
Your state and industry can have their own licensing requirements, if any. The best place to find the specifics is with the Secretary of State’s office for the state where your business is incorporated. If you do business in more than one state, then check their Secretary of State offices too.
Fundability, even for micro money, frequently depends on business credit. The biggest and best-known business credit reporting agencies (also called CRAs or bureaus) are D&B, Experian, and Equifax.
This is the only bureau for credit monitoring strictly focused on corporate credit. It checks your corporation’s interactions with suppliers and vendors. Many prospective suppliers go through the Dun & Bradstreet report on your corporation before offering credit terms. This means it is vital for you to keep the D&B report of your corporation updated and accurate.
Like Dun & Bradstreet and Equifax, Experian also gathers details available in various public records along with details from collection agencies, credit card companies and various other data sources.
This bureau also gathers all trade credit information and information from various public records to assess your corporation’s creditworthiness. However, their report depends heavily on how your corporation engages with various banks along with various traditional lenders like credit card providers.
These firms collect data and offer it to the business CRAs.
CreditSafe provides company and consumer reports. They also offer alternative credit, where they base some of their scoring on utility and rent payments. These payments are typically not considered by other CRAs unless they’re late. CreditSafe reports these payments whether positive or negative.
Utility payments on your CreditSafe report can include power, internet, and phone. Other third-party payments like Credit Suite can be included.
LexisNexis is a source where many of the lenders denying financing applications get their info from. They furnish details relating to likelihood to pay, or not. This includes on micro money applications.
Lenders compare LexisNexis information to what you put on your micro money funding application. If the application and LexisNexis don’t match, then loan providers will deny you a loan. They will see the disparity as fraud.
The SBFE gathers data on small businesses from its members, which are lending institutions. Lenders use this info to make credit decisions.
FICO uses its SBSS (Small Business Scoring Service) Score to combine consumer bureau, monetary, application, and business bureau information. FICO then validates their SBSS designs for deals like Line of credit transactions, term loans, and commercial card obligations up to $1 million. The idea is to review exactly how your small business repays all types of loans.
Business credit providers and the SBA use the FICO SBSS score as a tool to make a decision whether they ought to authorize a loan to your business.
The CRAs use identification numbers to designate your corporation. Experian’s BizSource assigns a BIN (Business Identification Number). You also need a D-U-N-S number. Start at the D&B website and get a free D-U-N-S number. If there is no D-U-N-S number, then there is no record and no PAYDEX score. Your D-U-N-S plus three payment experiences gets you a PAYDEX score.
Your corporate credit history is the single most important driver of your business credit scores. Consequently, this impacts fundability profoundly.
Late repayments will impact your business credit score for years. If you pay your company debts off, as quickly as possible and as completely as possible, you can make a very real difference in your credit scores. No other aspect of business management more directly impacts your corporate credit scores.
Make certain to pay on time and you will directly and favorably impact fundability.
If the business owner has poor personal credit, lenders will typically secure a UCC blanket lien if they give your business a loan.
A UCC blanket lien is a note which goes on your credit report. It states that the lender has an interest in all your business’s assets till you repay the loan in full. Therefore, there might be dire consequences if you default.
These UCC filings are a matter of public record. Lenders and credit providers take them into consideration when determining if your business is fundable.
These are all a matter of public record, and they can all negatively impact fundability.
Together with UCC blanket liens are any other types of liens as against your corporate assets. A lien is a credit issuer’s right to retain possession of property belonging to till the debt kept by that individual or corporation is discharged.
A lien isn’t quite the same as collateral. Rather, it’s the property which is subject to the lien is the collateral.
These come from credit issuers which give you starter credit when you have none. Terms are generally Net 30, rather than revolving.
The more trade accounts, the better. In general, at least five to eight are necessary before moving onto credit cards which are harder to get. But pay attention to your highest credit limit.
Your highest credit limit is an important figure for credit issuers and lenders. For example, unsecured financing can result in a loan of 5 – 8 times the amount of your highest revolving credit limit account. So by definition, the higher your highest credit limit, the more you can get from this form of financing.
In addition, some credit issuers want to see a particular high credit limit before they issue credit to your business. In general, a few high credit limit accounts do more to enhance business fundability than a large number of very low credit limit accounts.
How long have your trade accounts been open? This should correlate more or less directly with your time in business. By getting trade credit ASAP, your trade accounts are as aged as they can be.
Don’t buy business tradelines, to artificially inflate the age of your trade account. The FBI has found that the trade line company can be a fake and the primary card holder can be a stolen identity in these kinds of scams. Business CRAs are well aware of these scams. If you or your business are caught, you will be blacklisted by CRAs like D&B and your fundability will likely never recover.
Lenders and credit providers want to see your business’s financial data. So, this is even for micro money.
Opening and responsibly using business credit accounts can help you enhance your available credit and improve your credit rating. The key is to use your credit. Simply opening a lot of accounts and never using them is not going to do anywhere near as much to improve fundability.
Closing accounts has a direct impact on overall credit history. If a card is closed and is in good standing, it will fall off a credit report at some point. And once it’s gone, the history which accompanied it is gone, too. A card in good standing can be closed by the card owner or by the credit provider if the card owner hasn’t been using the credit. This is different from a card closed in poor standing, where that information stays on your credit report for longer.
By closing accounts, you are tanking the average age of your accounts. It’s a part of fundability over which you have control. Just use your credit and pay it back without delay. That way, your providers will not feel the need to close accounts for non-use.
The most vital issue with your corporate information is to be absolutely certain it corresponds from document to document. Business name and address, listed ownership, and contact information must be uniform.
Many credit providers and lenders not surprisingly wish to see your corporation’s financial statements.
Business financials include if your company is earning a profit. And they include your financial projections for the coming quarters.
Some alternative loan providers currently offer credit lines for $50 – 150,000. They will frequently only want tax returns versus all income documentation. For over $100,000, you must supply a P&L and a balance sheet.
The approval amount is usually 10% of annual sales per company tax returns.
Standard corporate financial statements include your income statement, a statement of retained earnings (AKA the statement of owners’ equity), company balance sheet, and a statement of cash flows.
It will dramatically and favorably affect your fundability if you have them prepared or at least audited by an accountant or an accounting firm.
For how long has your company been operating? And how many years has it been filing tax returns? Those numbers must be the same, even for years your corporation loses cash.
What is your corporation’s reported income? Do your reported expenses surpass your reported income? Are they commensurate with those expected from a business of your size, age, and industry?
Are your corporation’s taxes up to date? If payments to the IRS are slow as well as late, then lenders and credit providers will think your payments to them will follow the exact same pattern.
Particularly for newer companies, credit issuers and lenders will wish to see your personal financials. Can your personal financials be located? Do they show responsible financial stewardship?
Are your personal tax returns in order? Can you put your hands on all or at the very least the majority of your tax returns and provide them if requested? Do you file on time? If you have to pay, do you pay on time? If the answer to any one of these questions is no, then fundability is harmed.
Are they commensurate with the type of earnings and expenses anticipated from the owner of a company of your size, age, and industry?
This ratio is all of your monthly debt payments, divided by gross monthly income. This number is how lenders and credit providers measure your ability to pay back whatever you borrow.
Both affect fundability. Are you up to date on child support payments if you do not live with one or more of your minor children? Do you have a criminal record?
Just like there are business credit reporting agencies, there are CRAs for personal credit. In addition to reporting on business credit, Experian and Equifax also report on personal credit.
TransUnion only reports on personal credit. A TransUnion credit report can include your personal mortgage account, even if you completely paid your mortgage off. Your TransUnion report will also show any public records about you, such as judgments against you.
There are companies which collect data and provide it to the personal credit reporting agencies.
Some banks and other credit issuers use ChexSystems to get more information on your personal credit habits. They also report on insufficient funds, closed accounts, and overdrafts.
Lenders use LexisNexis information to cross-check loan applications. They want to see if their loan criteria are being met. They want to determine if what you claim on your application jibes with the records. And they want to know if it’s likely your business will fail.
Your FICO score comes from your payment history, amounts of owed, length of credit history, credit mix, and new credit. Together, the first three elements comprise over 3/4 of your FICO score. Responsible financial management, over time, will enhance fundability the most effectively.
Much like your business credit history matters for calculating fundability, so does personal credit history.
If the number of accounts over limit is more than zero, it can tank your fundability.
Are the authorized users on your accounts strangers who want to piggyback on your credit? This is just barely this side of legal and often a prelude to fraud. Most credit issuers and lenders will see it as proof of intent to commit bank fraud.
In a short sale, you try to sell your home for less than you owe. But this can only happen if the lender agrees. If the house sells, lender keeps the proceeds. Not all lenders agree to a short sale. Often, homeowners must be 90 or more days late for a lender to so much as consider the idea.
Some lenders may not forgive the unpaid balance on the mortgage. Some state laws let lenders seek deficiency judgments forcing you to repay the difference between the sale price and the balance due on the mortgage.
Lenders report a short sale to TransUnion, Experian, and Equifax as a charge off, settlement, deed-in-lieu of foreclosure, or loan settled for less than the amount due. How a lender reports the short sale can significantly impact the damage to your credit score.
Any late mortgage payments made before sale will further undermine your score. If lender gets a deficiency judgment to collect the mortgage balance, that also will damage your score, as will the amount of the deficiency.
A short sale will drop a personal credit score by up to 100-150 points. The higher your credit score to start, the more it will plummet.
Short sales can stay on your credit report for as long as seven years. But it isn’t as bad as a foreclosure or a bankruptcy.
Settled debt is a plus for fundability.
Just like a bankruptcy, foreclosures negatively impact your fundability. And the larger and later your late payments are, and the more of them there are, the more they harm fundability.
With fewer than five, your file may be seen as “thin” and it will negatively impact your fundability.
In general, major retailers and banks on a report correlate with a longer and more favorable personal credit history. But a shorter credit history is generally not seen as favorably as a longer one.
More than two recent inquiries will be seen as proof of credit shopping.
Credit Utilization Rate is credit in use, divided by total available credit. Keep this ratio at about 30% or less. Experian checks utilization rate both overall and per credit card.
This is a court proceeding where a judge and a court trustee check your assets and liabilities. Personal bankruptcy tends to be conflated with a lack of personal financial responsibility.
So, will an explanation to a credit provider or lender help with fundability? It’s worth the effort.
Even the process of applying can have an impact on your fundability. So, how are you submitting your application? So, what does your lender or credit provider prefer?
Your most recent three months’ worth of bank account management loom large. This is due to a number which banks keep but don’t publicize, the bank rating.
A bank rating measures the average minimum balance as kept in a business bank account over a three-month period. Therefore a $10,000 balance ranks as a Low-5, a $5,000 balance rates as a Mid-4, etc.
A small business’s chief goal must always be to keep a minimum Low-5 bank score. This means an average $10,000 balance, for at least three months. Without a minimum of a Low-5 score, most banks assume the business can’t pay off a loan or business LOC.
In particular, an application presented in person allows for a dialogue and negotiations. This is seen as the most serious and generally the most fundable. By proving your financial responsibility, lenders will be more likely to loan to you, and to loan you more. But you can start with micro money.
So, many lending institutions prefer working with certain industries. If the bank is more comfortable with your industry, then it will help your fundability cause.
Ownership documents will prove your business ownership, name, and address and bolster your fundability.
Keep all records consistent to ensure fundability. Set up your business legitimately, with a domain, phone numbers, an address, and more. So, get all ID numbers and register with the IRS. Set up your business bank account for fundability. Keep all business financials organized and have them prepared by a competent professional. Also, get your personal credit ‘house’ in order.
Because being fundable means your business can get financing from a credit provider or lender.