Article Summary: There are more options today than ever before for small businesses looking for borrowed capital. Nevertheless, there are a number of challenges small businesses face when seeking financing that need to be overcome to find success with a lender.

Most small business owners don’t take the entrepreneurial plunge because they are experts in small business finance (nor do I believe they need to be), but there are some things they need to understand to better meet the financing needs of their businesses. Francis Bacon said, “Knowledge is power.” I think that’s particularly true for a small business looking to borrow capital to fuel growth and fund other business-critical initiatives.

Here are three common obstacles or challenges small business owners face when seeking financing and a little “power” to overcome them.

Challenge #1: Your Business Doesn’t have a Track Record

This is the primary reason startups are often unsuccessful borrowing capital. They don’t have a track record or a long enough credit history a lender needs to evaluate their creditworthiness. It doesn’t mean they aren’t creditworthy; it just means the lender has no way to evaluate it. What’s more, this isn’t a challenge just for early-stage businesses. Even if you’ve been in business for several years, if your business has never borrowed, you don’t have a track record either. Lenders want to validate that you can successfully use credit. If you’ve ever heard a lender say, “The credit file is too thin,” that’s what they’re talking about.

Overcoming Challenge #1

There’s really no shortcut to overcoming this challenge, it takes time to build a business credit profile. Most traditional lenders, like the bank, want to see several years in business, although some online lenders, like OnDeck, will only need to see a year before they’ll consider a small business loan application.

There are some things you can do to improve your credit track record:

  1. Reach out to your vendors and suppliers to see if they offer 30-day payment terms on the supplies or merchandise you purchase from them. Although it’s not a small business loan, trade credit with your suppliers is one of the most powerful ways to build a strong credit profile (provided your suppliers report your good credit history to the appropriate business credit bureaus).
  2. Look into a business credit card. Many business credit cards are a little easier to qualify for than a small business loan, so they can be a potentially good way to start building a business credit profile. Make sure they report your good credit behavior to the business credit bureaus and you’ll be well on your way to building a good profile.

Challenge #2: Difficulty Demonstrating You Have the Income to Service Debt

Lenders want to confirm that your business has the ability to service debt. Traditional lenders, like banks, are usually looking for $1 million in annual revenue while online lenders are typically looking for annual revenue of $100,000 or more. Regardless of the lender you talk to, one of the first questions they want to answer is whether or not your business has the ability to make each and every periodic payment. If your business doesn’t meet their income or cash flow requirements, it’s unlikely they’ll approve your loan application.

Overcoming Challenge #2

If your small business doesn’t meet the minimum revenue or cash flow required by your lender, it’s not likely your business will qualify for a loan. Fortunately, borrowed capital isn’t the only way to grow your business and I would be remiss if I didn’t mention that it’s really creative problem solving, rather than money, that builds a successful business.

Nevertheless, there are other sources of capital that don’t have the same credit requirements as a small business lender. If you have the ability to leverage a relatively small amount of capital to produce a big result, a micro-loan could be an option for you. Many non-profit lenders offer smaller loans to businesses that might not otherwise qualify for a small business loan. The SBA offers a micro-loan program with loans of $50,000 or less, but there are other lenders who provide loans in the $5,000 to $10,000 range that could be a good way to find capital and build your business credit profile.

If you bill your customers by invoice every month, factoring could be an option. Because the factor usually bills your customer directly, they are more interested in the creditworthiness of your customer than they are your business credit profile. Factoring isn’t a loan, but you are rather selling your accounts receivable at a discount to the factor.

Crowdfunding is another option. If you are persuasive and have a great business idea, crowdfunding could be a way to get capital. The idea that crowdfunding is “free” money would be incorrect though. Those who are successful at crowdfunding treat it the same way they would an angel investor or an equity investor. They spend a lot of time building a pitch and presentation to motivate the crowd to donate and be a part of their idea.

Challenge #3: You Don’t Completely Understand What Your Financial Reports Are Telling You

I once spoke with a lender who said, “If I can tell more about a business’ health by looking at the financial reports than the business owner, I’m not going to offer them a loan.”

I don’t believe every small business owner needs to be an expert accountant, but there are a handful of metrics they should be very familiar with to understand the story they tell. I believe that chief among those metrics is your cash flow metric. Poor cash flow management has tolled the death knell for many otherwise healthy businesses, so understanding your cash flow is not only important to monitor the health of your business, but it will tell you whether or not your business is really in a position to service debt.

Overcoming Challenge #3:

One of my best friends is a CPA. When I was a business owner, he and I often talked about how my business was doing and he helped me better understand my financial reports. He used to say, “Every business needs a profit expert.”

The profit expert is the person who understands the financial ins-and-outs of the business, can recognize profit trends, can identify potential places to improve profits, and can skillfully interpret the financial reports into something actionable. Most of the time, the profit expert is the business owner, but there are times when it is a trusted accountant or bookkeeper.

Becoming the profit expert will require you to dive more into the financial reports to make sure you have a complete understanding of what the numbers are telling you. If you’re unsure, your accountant or other trusted business financial advisor can help you.

Most small business owners look at their accountant transactionally. In other words, they have them file their business taxes, etc., but I’m convinced that building a more consultative relationship with an accountant is a better approach. It will help them leverage their accountant’s skill and insight into the accounting process, will help them become their own profit expert, and will ultimately benefit their business—whether or not they are looking for a small business loan.

If you’ve experienced any of these challenges in your business, please share how you overcame them in the comments section.

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