One of the many differences between banks and alternative business lenders is that the latter doesn’t only work with well-established businesses. At United Capital Source, we fund businesses that have been open for a mere six months, compared to a year for most other online lenders. Business lenders do this so they can work with more businesses and hopefully trim the frighteningly high small business failure rate. But while the intention was to get more businesses to contact us, some potential borrowers might find our loose requirements for approval somewhat suspicious.
Banks only work with well-established businesses because their reliability is easier to assess. They have a proven track record in terms of cash flow, revenue, and profitability. The reliability of a younger business, on the other hand, seems much harder to judge.
1. Work on building business credit
It is obviously difficult for a young business to accumulate a lot of revenue. What a young business can do, on the other hand, is build a strong credit profile. So, rather than concentrating solely on earning as much revenue as possible, a young business considering small business loans should simultaneously concentrate on building credit. After forming trade relationships with vendors and/or suppliers, make sure they report your credit history to the major business credit bureaus. These credit bureaus take your business partnerships into account when calculating your business’s credit profile.
Aside from business partnerships, the other primary indicator of your business’s ability to manage debt is your use of business credit cards. Thankfully, all you have to really do is make timely payments and only use business credit cards when it is necessary or widely recommended to do so. And, as you’ve probably heard time and time again, never use a personal credit card for business-related expenses. Every time you use a personal credit card for business-related expenses, you are missing the chance to improve business credit.
2. Start with a smaller business loan
We are aware that in today’s growth-obsessed environment, more and more young businesses are taking on massive amounts of debt to finance large projects. But in our experience, giving a young business an excessive amount of money is more likely to do more harm than good. Borrowing too much money can not only leave you with too much debt but also tempt you into unsafe spending habits. Instead, it’s best for young businesses to start small, most likely with an easily manageable short-term working capital loan. Think of the “short-term” as a reference to the time it will take for the debt to improve your business credit and overall reputation.
Smaller loans can be especially beneficial for businesses with credit problems. Proving that you can pay off debt on time without impacting cash flow is the most effective way to erase bad credit history. Paying off a smaller loan will also likely make you eligible for a second, larger loan with more convenient terms later on. But the greatest reward of taking a smaller business loan so early in your career is priceless knowledge and experience. Some of your competitors probably weren’t so lucky and had to crash and burn before they learned how to properly request and pay off a small business loan.
One common function for a short-term working capital loan is capitalizing on a one-time special discount from a supplier. Such discounts are typically only available for customers with quick access to extra cash. Lucky for you, companies like United Capital Source can approve and distribute short-term working capital loans in under 48 hours.
3. Familiarize yourself with viable options
Speaking of knowledge, young businesses often make up for their limited track record by amassing a firm understanding of viable business funding programs. This doesn’t just mean knowing the definitions of a merchant cash advance, revenue based business loan, SBA Loan, etc. Business lenders will be more appreciative of an applicant who knows what kind of financing is best for his or her business at this specific point in time. Your list of options becomes a lot more narrow, for example, when you know whether you need short-term or long-term financing. This can help you decide between a merchant cash advance and business line of credit, or a working capital loan and a revenue based business loan.
As for the borrowing amount, applicants should have at least some data to back up their request. The business lender will understand that you have limited data to work with but you should still calculate how much you can afford to pay back each month, how long it will take you to pay off the debt in full, and, if applicable, how much more revenue you are projected to bring in as a result of the business loan.
Slow and steady wins the race
It’s important for owners of young businesses to not feel like they are “wasting” their first business loan on what seems to be a “minor” inconvenience. Yes, in the not-so-distant future, you will probably need a lot more funding for a much bigger problem. Arguably best way to guarantee your approval for that larger amount is to pay off a smaller loan now. Times have changed. Rather than waiting until your business is in serious trouble, it is recommended to establish a relationship with a business lender as early as possible. In addition to a sensible amount of money, you’ll receive crucial financial advice that ensure that you will not contribute to the towering failure rate of small businesses.