When it comes to funding a business, personal funds is the most popular source of capital. For many businesses that don’t have access to such capital, business funding are a close second. Navigating the crowded world of business funding can be an overwhelming proposition for the business owners who is already overwhelmed and pressed for time.
As small business owners ourselves with years of experience navigating business funding, we have prepared this information to help guide you through the process of learning about and finding the small business funding that best meets your business needs.
How do I qualify for a small business funding?
Every lender has its own set of underwriting criteria, but they all look at the same things, such as your personal credit score, the length of time you’ve been in business, and your annual income. Your cash flow and ability to repay the debt are also taken into account by lenders.
Small-enterprise funding for small business owners often demand a high personal credit score (in the 700s), several years in operation, and a strong track record of sound business finances. In some cases, banks may require collateral such as real estate in order to protect their risk.
When applying for a funding, you may be requested to provide your tax returns, bank and cash-flow statements, and other documentation. The exact documentation will depend on your lender.
What is an important factor in getting a business funding?
Personal credit that is in good standing can help you qualify for reduced rates and more lending possibilities. If your personal credit is not strong, consider making improvements to your credit before applying for a funding, if your business does not require small business financing right away.
What is a good credit score to get a business funding?
A personal score of 720 or higher is recommended to obtain funding. A good credit score for a firm is 80 or higher. Limiting personal funding and making your monthly payments on time go along way to increasing your credit score on your credit report. A business owner with excellent credit can often get very good terms on the business financing.
Credit bureaus often use proprietary algorithms to determine credit scores. As a result, scores may differ. Every lender, including online lenders establishes its own set of criteria.
On the other hand, The 2020 Small Company Credit Survey (p. 12) of the United States Federal Reserve Banks lays out the general rule for small business lending:
Low credit risk: a business credit score of 80–100 or a personal credit score of 720 or above.
Medium credit risk: business credit score of 50–79 or a personal credit score of 620–719 or above.
High credit risk: a business credit score of 1–49 or a personal credit score of less than 620.
Low-credit-risk borrowers have the greatest financing options at the best terms. In contrast, high-risk borrowers have limited funding options, will pay the most, and even have difficulty securing capital.
Is there a minimum credit score for a business funding?
A small business funding may not require a minimum business credit score. Each lender has their own set of requirements. However, there are some general guidelines. A personal credit score of 620 is generally the accepted minimum score, while you will almost certainly need a credit score of 720 or above for good terms on your funding.
Who is eligible for a small business funding?
Who is eligible for a small business funding will depend on the type of funding desired and the lender you will be working with. As an example, literally any small business was eligible to participate in the Paycheck Protection Program (PPP). In contrast, the Small Business Administration has set a high bar for who its lenders can work with.
Are small business funding hard to get?
Like the answer to the previous question, it will depend upon the type of business funding you seek, your lender, and the amount you would like to borrow.
What are the types of small business funding?
Because there are so many different types of small business funding, it’s critical to do your homework before starting the application process. Otherwise, you may end up with a small business funding you don’t need or want.
According to business.org, “getting a company funding appears simple until you discover how many sorts of funding exist and how many lenders provide those funding.” “All of a sudden, you find yourself surrounded by options you had no idea existed.”
The best way to start is to determine how you will use your funding proceeds. Before approaching a lender, it is suggested that you have some idea in terms of how you will use the funding proceeds. Next, figure out how much money you need, and how long you’d like to have to pay back the money.
Small business funding
SBA funding, term funding, company lines of credit, and invoice factoring are some of the funding choices available to qualified business owners. To qualify for small business financing, a lender will often require at least a year of experience and income. Additional financing options are available to startups in operation for less than a year.
Small Business Administration funding
Consider the Small Business Administration (SBA) as a close friend in the federal government. This federal agency’s principal goal is to assist small businesses in obtaining the funds and resources they require. The SBA aids small companies that are disadvantaged and would otherwise be unable to obtain assistance.
You can get an SBA funding for as little as $50,000 and as much as $5,000,000. Term lengths vary widely, often ranging from 10 to 25 years. SBA funding come with a long and cumbersome application process that require several months to complete.
The SBA does not make funding. Rather, it guarantees a significant portion of each funding, reducing the lender’s risk and incentivizing the funding.
What are the different SBA funding available?
The SBA has a number of funding programs, with varying funding terms available to business owners. Because of their low interest rate, they are very popular. Popular choices include:
The SBA 7(a) funding
The most popular SBA funding and can be utilized for a variety of purposes. If you’re looking for a funding for less than $25,000, collateral may not be required. For a funding amount in excess of $350,000, be prepared to provide substantial collateral. The maximum funding amount is up to $5,000,000 for the best borrowers.
SBA / CDC 504 funding
funding providing long-term, fixed rate financing of up to $5 million for major fixed assets that promote business growth and job creation. They are available through Certified Development Companies, the SBA’s community financial institutions who regulate non-profits and promote economic development within their communities. To be eligible, your company must have a net worth of at least $15 million and an annual net income of no more than $5 million.
SBA Express funding
This form of small company funding is, as the name suggests, is extremely quick. With an SBA Express funding, you can borrow up to $350,000 as long as you meet the requirements. Your application will be assessed in 36 hours or less. However, because this is still an SBA funding, your funds will most likely arrive in a month.
The Paycheck Protection Program, which was designed to help small-business owners keep employees on the payroll as a result of COVID-19, was also administered by the SBA. On May 4, 2021, the general fund for PPP funding ran out of money and the program ended on May 31, 2021.
Business line of credit
Consider a company line of credit (LOC), or revolving credit if you require flexibility. You can borrow between $1,000 to $500,000, and the funds are usually accessible within a week or two. Interest rates range from 8% to 24%, and funding are normally for a period of one to two years.
A revolving business line of credit allows you to access funds when you need them rather than receiving your funding proceeds in a single sum. There is no pressure to use the money and as long as your LOC is open, funds are available. With a line of credit, you only pay interest on the money you spend.
It’s not difficult to qualify for a company line of credit. If you have been in business for more than six months, pull in $50,000 or more in annual income, and have a credit score of 560 or higher, you are an ideal candidate for an LOC. Additional eligibility conditions may apply.
As part of the application process, a lender may ask you, the business owner to sign a personal guarantee as part of the application process. If you default, this permits the lender to go after your personal assets.
Business term funding
A business term funding can help you get operating cash, expand your business operations, buy equipment, recruit more employees, and whatever else you need.
Term funding have been a popular funding vehicle with entrepreneurs for many years. They are popular and dependable. Term funding amounts range from $5,000 to $2,000,000, with the money wired to your account within a few days.
funding terms are usually for 1 to 5 years and can be had for as low as 6%, at a fixed interest rate. An advantage of a term funding is that it is easier to determine how much you can afford to borrow.
Accounts receivable funding
Most businesses deal with unpaid invoices on a regular basis. The problem is so widespread that analysts estimate that our country’s firms owe $825 billion in unpaid invoices. It’s normal to have someone owing you money, but when they don’t pay, it may be disastrous for your business.
Accounts receivable financing (also known as factoring) is designed for when you need money but can’t get it because of unpaid bills from customers. With factoring, you sell your purchase order or receivables, getting the money you need to run your business. Terms vary but you can borrow up to 80% of your receivables. Funds can be wired to your account in as little as three days, with a funding period of up to a year, at an interest rate as low as 5%.
Working capital business funding
A working capital funding is used to fund a business’s day-to-day operations. These funding are used to provide working capital to fulfill a company’s short term operating activities rather than to purchase long-term assets or investments. Operating activities covered by working capital funding include payroll, rent, marketing activities, and purchase inventory. A working capital funding is debt that a company takes on to fund its day-to-day operations.
Merchant cash advance
With a merchant cash advance (MCA), you borrow against your future profits to get the funding you require now. Once your MCA has been funded, you’ll start repaying your advance in the form of a percentage of your daily credit deposits deducted by your lender. Because there is a lot of flexibility in terms of how you can use your advance, this type of financing is known for being very flexible and short term.
Merchant cash advances, like short-term funding, are funded very quickly. You can apply for between $5,000 to $200,000, and get your money in as little as 24 hours. Flexibility and speed comes at a price though, as you can pay upwards of 18 percent to access these funds.
Qualifying for a merchant cash advance is surprisingly simple. They don’t require a mountain of documentation to apply, and the lender is unlikely to ask for collateral. Additionally, a lender will most likely not look at your credit, as they will normally only look at your bank statements, annual revenue, or receivables from the last 4-6 months.
Equipment funding
Equipment funding are borrowed funds to purchase any type of equipment your business requires. With amounts up to $5,000,000, you can buy backhoes, trucks, forklifts, tractors, cubicles, refrigerators, trailers, conveyor belts, and garbage and anything else your company needs to sell its products’ or services. This includes payment processing software, solar panels, or office accounting software. The point is that if the acquisition would help meet your business needs, it is eligible for purchase.
Equipment funding are often funded quickly. With this type of small business capital, you may receive funding in as little as 24 hours. Another advantage are competitive interest rates that can start as lows as 7.5 percent.
Equipment financing is easier to qualify relative to other forms of financing. If your company has been in operation for more than a year, generates at least $50,000 in yearly revenue, and has a credit score of 650 or higher, you should be in good shape. Don’t despair if your credit score is below 650. You can still get funding if you demonstrate consistent cash flow and provide revenue for the previous 3-6 months.
Additional funding options
Business funding are just one of the funding options available to entrepreneurs. There are many more such as personal funds, venture capitalists, and angel investors.
What are smart reasons to take out a business funding?
There are several smart reasons to take out a business funding, including:
- Grow your business
To expand your business requires capital. There are a number of financing options available with many online.
- Cover capital expenditures
Every business needs equipment to provide their product or service, many of which are very expensive. Rather than save up or use precious cash, a business can borrow to get their equipment and pay it back with a small monthly payment.
- Keep cash available
Rather than use your own cash, borrow money to capital and operating expenditures.
- Pay bills
Money businesses offer credit for their products and services and can borrow to pay their bills, until they are paid by customers.
- Protect personal finances
One of the most popular sources of capital for a small company is the personal finances of the owner. Borrowing capital to finance capital or operating expenses protects the entrepreneur’s finances.
How do I apply for a business funding with bad credit?
Seek out a lender who will work with a business having bad credit, or if you meet other conditions, you might be able to acquire a funding with bad credit. While your credit score is crucial, lenders may also evaluate your income, debts, collateral, and credit history before approving a funding.
Why ZIP Capital Group?
Zip Capital Group is a financial company founded by entrepreneurs for entrepreneurs and offer a number of finance solutions, including MCAs, working capital funding, equipment funding, and SBA coaching.
Contact us online or call (800) 795-3919 today
