As an entrepreneur preparing to launch a new venture, you should know that getting business capital funding is an important consideration for your development process. While starting a business may be very exciting, it’s also difficult because you have limited credit history, which can pose challenges for your business.
There are many types of financing sources available to entrepreneurs to meet the changing needs of new businesses, depending on their size and stage of development (i.e., starting or expanding). You have many options in various capital business financing categories that meet your specific business needs, regardless of your credit history or how much capital you need to fund your new business.
How Lenders Evaluate New Businesses and Business Capital Funding
For startup businesses to receive business capital funding, they won’t be able to rely on a credit rating from lenders to make a decision on whether or not the loan is approved. Lenders now look at the health and potential of an applicant’s business as their deciding factor for approving a loan application. Business plans, future cash flow projections for the business, as well as the entrepreneurs’ experience in running a similar business, are used by lenders when determining if they will provide a loan. Because there is no credit history available to lenders for many startup businesses, “soft” data includes, but is not limited to, the rate of growth in the industry that the startup is operating in, as well as any competitive benefits derived from the startup’s products and services.
Financing Solutions with Easier Qualification Standards
While a standard business capital loan may not be available at first, there are many other options for financing that offer faster and more flexible approvals.
1. Equipment Financing
Equipment financing is one of the more straightforward forms of business capital funding because equipment acts as collateral. An equipment loan lowers the lender’s risk because of this built-in collateral, so they are more likely to overlook your lack of credit history or personal credit profile, making it accessible for startups to purchase the machinery, vehicles, or IT hardware necessary to operate their businesses.
2. Invoice Factoring
If you are a service provider to other businesses, you can convert your accounts receivable into immediate cash by factoring your invoices. Instead of waiting 30 or 60 days for your clients to go through their payment cycle, you can sell your invoices to an invoice factoring company for a small discount. Factoring invoices is also a reliable source of business capital funding since the application does not focus heavily on the creditworthiness of your business, but rather on the creditworthiness of your customers.
3. Microloans from Non-Profits
Community Development Financial Institutions (CDFI) usually offer microloans to entrepreneurs who are underserved. These groups have less profit motives and more of a mission and are focused on growing the economics of their community rather than focusing on creating a strict credit score to evaluate the risk of lending. The amount of business capital funding provided with microloans is generally smaller than what would be given with traditional loans. However, the borrower also receives mentorship and technical assistance to help them succeed.
4. Merchant Cash Advances
Although merchant cash advances aren’t technically loans, they do involve advances against your future credit card sales. Retail and hospitality businesses that typically conduct a high volume of credit card sales often utilize MCAs as a source of business capital funding for their business needs. To repay the advance amount plus a factor rate fee, the lender collects a predetermined percentage from your daily sales until the total amount owed to them has been fully repaid.
5. Crowdfunding Platforms
Crowdfunding has changed how startups raise capital by allowing the startup to go directly to the general public and raise capital from customers instead of relying on traditional financial institutions. When the startup shows its project on a crowdfunding platform such as Kickstarter or Indiegogo, the startup raises business capital funding from future customers who are interested in purchasing the product once produced.
Practical Ways to Improve Approval Chances
To secure business capital funding, it is important to not only choose the best financing product but also to accurately represent yourself and your business to the lenders. To do this, lenders examine the founder for signs of being organized, prepared, and committed to the success of their business:
- Professional Business Plan: Detailed roadmap, with clear revenue projections and market analysis, evidences commitment to the business.
- Business Credit File: Obtain a D-U-N-S number and separate business bank accounts for all business transactions.
- Accurate Financial Statements: By using accounting software to record transactions, the founder can demonstrate fiscal responsibility and transparency.
- Collateral or Personal Guarantee: Providing collateral or personally guaranteeing a loan significantly decreases the lender’s risk profile while demonstrating the founder’s commitment to the business.
Final Words
Having a short credit history might feel like it’s impossible, but it is only a barrier that you can get around with a smart approach. Finding a way to use either equipment financing, factoring, or even microloans is one of the best ways to start overcoming the complications of today’s financial world. Your new business has many choices when it comes to getting the financial resources necessary for building credit and ultimately continuing to grow.
