1. 3 of the Most Popular Types of Business Funding - PDF

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1. 3 of the Most Popular Types of Business Funding Credit lines are what most business owners want access to. They are also one of the hardest types of financing to qualify for. To get approved for real
1. 3 of the Most Popular Types of Business Funding Credit lines are what most business owners want access to. They are also one of the hardest types of financing to qualify for. To get approved for real credit lines you must supply business financials in almost all cases Financials include your business tax returns for 2-3 years. You might also be asked for P&L statements both current and projected, bank statements, a business plan, and more. Your approval amount will be based on the profits you show on your returns and your tax returns also should show that you have increasing profits. Your personal and business credit will be reviewed and both should be good to get approved. Lenders like to see that you have open credit lines now with very high limits. Approval amounts might also be linked to your existing limits now Business loans are available at a lot of places including SBA loans offered from conventional banks. Many lenders also provide business loans and some other types of collateral based financing also offer loans such as book-of-business financing for insurance agents. Many loans are for shorter terms, usually 3-5 years, and others might go as long as 20 years or longer. Rates vary based on risk, with some being two percent over prime rate and others being as high as 10%. To get long terms loans you will almost always need financials, and in many cases collateral. Merchant and revenue advances are becoming increasingly common in the business funding arena. These are just like cash advances in the consumer world. They are much easier to secure than loans and credit lines. In most cases you can get approved with no business financials being provided, including no tax returns. Advances usually close very fast, within a week, when loans and credit lines take days to close. The terms aren t as favorable on advances, but the scope of who qualifies is very broad. 2. Business Credit Cards Available for You Now There are a few types of credit cards you can secure in the business funding world. Most of these cards work exactly as consumer credit cards do, but with additional benefits. The provided benefits depend on the type of cards you are getting. You can get credit cards for your business through Visa, MasterCard, AMEX, and discover that you can use them almost anywhere for almost any purpose. These cards are secured by you having a good BUSINESS credit report and score; you usually need 10 payment experiences and a Paydex score of 80 or higher to be approved. These card limits will mimic your highest business credit card account limits now. Rates are similar to consumer cards and no personal guarantee from you is required. You can use your personal credit to get approved for real business credit cards instead of using your business credit. These accounts will require you to provide a personal guarantee. To get approved you must have VERY good, near flawless personal credit with less than two inquiries in the last six months and utilization below 30%. You can typically get five times the amount of credit of your highest limit reporting card now, this will come in the form of five separate cards and these cards usually only report to the business credit reporting agencies and offer intro rates of 0% for 6-18 months. You can use your personal credit to get approved for real business credit cards instead of using your business credit. These accounts will require you to provide a personal guarantee. To get approved you must have good credit, but you won t need as good a credit as Business Unsecured cards. You might need less than 10 inquiries in the last 90 days and utilizations can be near 60% and you can still get approved. You can typically get five times the amount of credit of your highest limit reporting card now, this will come in the form of five separate cards. 3. Radically Important Business Basics Part 1 Lenders and creditors have very specific requirements of what they want to see to approve you for credit and financing. Here s what they re really looking for: Your Business Name If you are just choosing a name, try to choose as basic and loose of a name that you can that doesn t peg you into one industry. There are a lot of industries that fall on restricted lists. General consulting type names work best as nobody will deny you then, any other industry specific name very well might restrict your ability to get money with some lending sources and credit issuers. You need a BUSINESS phone don t use a personal home phone or cell phone. YES, lenders WILL know!!! So don t even try applying for money without a real business phone. Voice Over IP numbers are okay. You should have a toll free number, unless you only deal with local business such as a pizza shop. You should have a fax number. Your number MUST be listed with 411. Try listing yourself for 411 listing. Being a home owner increases your chances of being approved. It shows a greater level of maturity and responsibility. Plus, it shows you can manage a higher monthly payment. And your home might even be used as collateral for some financing such as SBA loans. Lenders love assets because they love collateral so when you are asked on an application about the assets you have, what the lender is really looking for is what you can use as collateral for the debt. The more collateral you have, the better chances you have of being approved with many types of financing. SBA loans REQUIRE the lender to take ALL assets you have in your business as collateral and if still not enough they will take personal assets such as your home. Some lenders, such as advance lenders, don t need collateral. It still helps them feel more secure in lending you money if you do have assets to show. Many things can work as collateral such as 401k and stocks, real estate, inventory and equipment, purchase orders and receivables, and other items that are easy for a lender to sell and get their money back in case of default. 4. Radically Important Business Basics Part 2 Lenders and creditors have very specific requirements of what they want to see to approve you for credit and financing. Here s what they re really looking for: The longer you re in business the better your chances of getting approved for almost all types of financing. This is because EXTENSIVE statistics on this show that the majority of businesses fail in early years, three years or less of being open. The longer a business is open the more their chances of failing decline. So longer standing businesses have a much less risk of going out of business than shorter standing ones do. Being open less than one year makes it tough to get financing and you can get unsecured personal and business cards with no issues. But advances are tougher, and loans are nearly impossible to secure. Some business credit vendors, stores, and cash credit sources also might not approve you if you have been open one year or less. Three years or more is what most sources prefer and this is part of the reason that SBA loans require 2-3 years of financials. Having good stable revenue can be one of the main reasons you get approved for some funding products, such as merchant or revenue advances. Just in having consistent revenue alone can get you approved. But almost all sources do require that you have revenues coming in for approval. Some sources such as personal and business cards won t require verification. Other sources such as lenders to lend advances will verify your cash flow with your bank statements. Most lenders issuing loans and credit lines will require tax returns on top of P&L statements and bank statements to verify your income. Your tax returns must show good profits, the amount you show will determine the amount of money you are approved for. You must show increasing profits from year-to-year, not declining profits. Declining profits are a sign of trouble, and most lenders will RUN away from any deal where the applicant has revenues or profits declining from year-to-year. There are many high risk industries lenders don t prefer. The list of high risk industries is different for each lender and funding type. Some lenders have been burned by one type of industry and black list it, while other lenders offering similar products are okay with that industry. Some industries are almost always seen as high risk no matter what lender you apply through. Vices are almost always seen as high risk such as gambling and porn. Other industries such as financial services are restricted with many lending sources, but not all. Financial services can include credit repair, lenders, accountants, insurance agents, mortgage brokers, realtors, and anyone else dealing with any type of financial transaction. Always ask upfront if the lender views your industry as high risk Types of Credit Your Lenders ARE Looking At When you apply for business financing there is actually three types of credit that are reviewed for your approval. No matter what you re told personal credit ALWAYS matters unless it isn t being looked at. For example, when applying for business credit you can use your EIN to get approved and leave your SSN off the application. When you do this your personal credit isn t even looked at nor is it used for the lending decision but this is about the only exception in the business funding space. All other funding types including advances look at and care about your personal credit. YES, you can get approved for cash flow financing and merchant advances with bad credit but your repayment terms won t be nearly as favorable then if you had good personal credit. SBA loans, conventional loans, most other long term loans, and credit lines do require good personal credit for approval in most cases. Collateral and asset type based financing doesn t care about personal credit as much. This is if financing only looks at collateral for approval, not financing where collateral is required for approval. There is no FCRA in the business world, so lenders will never disclose to you that they pull your business credit when you apply for business financing. But they DO pull your business credit!!! Just think, you are applying for money for your business, and your business has its own credit profile and score. So of course they will want to see how the business pays its bills on top of how you do as the owner. Not having establishes business credit makes you look like a rookie, a startup, a nonestablished business. This will lead to denial so insure you have at least 5-10 reported accounts and that you are paying them as agreed. You actually have three types of credit: Personal Credit, Business Credit and Bank Credit. All three should be good to give you the best chance of approval. Your bank rating is mostly based on the amount of money you keep in your bank account over the last 90 days. High 5, account balance of $70,000-99,999, Mid 5, account balance of $40,000-69,999, Low 5, balance of $10,000-39,000, High 4, 7,000-9,999, Mid 4, 4,000-6,999 and Low 4, 1,000-3, Underwriting Timeframes and Due Diligence The higher dollar amount loan or line you secure, the longer it will take to underwrite no matter what type of financing you are applying for. Loans usually take days or more. Credit lines usually take about days or longer. Advances are very fast, usually can be secured within seven days or less. Credit cards usually take three weeks or less to secure. All lenders will do a due diligence check on you and your application. They will look to see if you have other outstanding loans you neglected to mention on your application. They will check to make sure your lease or mortgage is in good standing, they will look to see if you are going out of business and they will even look at your online reputation. The purpose of this check is to find hidden risks that they couldn t find on the application and the other purpose is to see if you left information off of the application intentionally. So make sure you disclose everything you are asked to, otherwise lenders WILL find out about it. These checks usually only take 1-3 days to complete. 7. Choosing the Right Financing There are a lot of different financing options available today. There are so many options that you might not be sure where to start. Let s dive into some of the available options you have to see what works best. Most business owners try to first apply for financing at their bank but according to the Department of Revenue, only about 1.1% of all business funding comes from conventional banks such as SBA loans. Your bank can help you with credit lines and loans, but you MUST have financials and good credit for approval. Google SBA loan approval checklist to find this page https://www.sba.gov/content/businessloan-checklist. This list is all that you will need for conventional loan approval. MOST business financing that happens today comes from alternative lenders, NOT the big banks. These are lenders who have carved out niches in the business funding world. They typically focus on only one aspect of your business to make a lending decision. If that one area of your business is strong, you can get approved even if you are weak in other areas. This is very different from SBA loans that look at the whole picture. Alternative lending is much easier to secure than conventional loans and you can usually get approved and funded much faster also. The terms typically aren t as favorable as conventional financing, but you can often get approved when your bank would tell you no. I group alternative lending into 3 categories, credit, collateral, and cash flow. We have discussed several funding types that are available based on your credit. Some use your business credit for approval while others use your personal credit for approval. You can t go into your bank and get multiple business or personal cards. But there are lenders who focus on this type of financing only, and can get you multiple high-limit business credit cards that report to the business reporting agencies and have great incentives such as low intro rates. Remember, you must have good personal or business credit to be approved and you can be approved even if you are a startup. Collateral based lenders are also called asset based lenders. They can approve you for money even if you have bad credit, and in many cases if you just opened your business. The key is you need acceptable collateral to get approved. Acceptable collateral includes 401k and stocks, inventory, equipment, real estate, a book-ofbusiness (insurance agents only), a car lot inventory, purchase orders and account receivables (if from another business), commercial signs and graphic wraps, and other viable types of business collateral. Vehicles are depreciating assets and typically won t qualify. Rates and terms on collateral based funding are VERY good, sometimes better than conventional loans. It s not uncommon to get rates of 5% or less, even with bad credit. If you default, the lender just takes your collateral, so the risk isn t as high as with other types of business funding. Most advances are forms of cash flow based financing. This is the fastest and easiest money you can get your hands on and you can get approved with bad credit and no collateral. But you will need to show bank statements that prove you have over $10,000 in monthly deposits and at least six monthly transactions. You can usually get as much as 12% of your annual revenues advanced to you. These are cash advances so the rates are not great, ranging from 8-45% depending on risk and you will usually be approved for a 6-18 month payback. Once you prove yourself with your first advance, terms get MUCH better on future advances. This is why we find that over 70% of those who get their first advance come back and get more money ongoing. There is A LOT of money available for business owners, more now than there has ever been in the past. You just need to know what type of financing to go after, once you know that you can more easily find what you need.
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