Guide to Securing Funding for Small Businesses
Learn effective strategies to secure funding for your small business. Discover how credit scores, business age, revenue, collateral, and assets influence loan approval. This guide covers traditional and alternative financing options, including quick cash solutions like ACH and equipment leasing. Understand when and how to leverage your assets, equity, and revenue to access funds efficiently. Ideal for entrepreneurs aiming to grow their small businesses with informed borrowing decisions and better understanding of their financing options.
Guide to Securing Funding for Small Businesses
Obtaining financing can be challenging for small businesses as traditional lenders, including banks and credit unions, have tightened their loan criteria. Understanding the key factors influencing loan approval is crucial for entrepreneurs seeking funds. Here's a comprehensive overview of how to improve your chances of securing a small business loan.
- Creditworthiness
Maintaining a strong personal credit score is essential, especially if you own a significant share of your business. Lenders often consider your personal credit, which affects about 20% or more of the approval process.
- Business Age
New startups operating for less than two years often face difficulties obtaining traditional bank loans, which generally require at least two years in operation. Alternative lending platforms may approve businesses that have been active for just 3-4 months, based on their revenue. Once a business surpasses two years, the likelihood of qualifying for more favorable, lower-interest loans increases. Early-stage businesses are usually subject to higher APRs due to perceived higher risks. If possible, avoid borrowing during the first two years, focusing instead on growth and financial stability, unless urgent cash is needed.
- Monthly Revenue
To qualify for funding, many lenders look for businesses generating at least $5,000 per month, often after two years of operation. Loan amounts typically depend on your bank account's average daily balance and overall financial performance. It's essential to maintain sufficient cash flow and revenue to access and repay these funds. Businesses with lower balances may qualify for smaller loans aligned with their repayment capacity.
- Collateral
Various collateral types can support loan approval, depending on the loan type and amount needed. - Business Assets and Deposits
Your business bank account, as a core asset, can serve as collateral or proof of financial health. - Home Equity
If you own a home, leveraging equity via a home equity line of credit (HELOC) or refinancing can provide quick cash. Selling or refinancing your property may also free up funds, but such options typically exclude investment properties. - Business Equipment
Owned equipment can be used as collateral or leased for quick cash. Sale-lease-back arrangements are a common way to convert equipment assets into working capital.
These methods can significantly assist small business owners in obtaining the necessary funding to grow and operate effectively.
