What does Fundability mean in Small Business Financing?
Fundability refers to the likelihood of a small business securing financing from lenders or investors. It encompasses various factors, such as the business’s credit history, revenue, profitability, industry trends, market potential, and the owner’s personal credit score.
Lenders view a highly fundable business as a low-risk investment. As such, it is more likely to receive favorable loan terms and interest rates. Businesses with high fundability are also better positioned to grow and succeed in the long term. This can make it more challenging to obtain startup funding.
How can my Business establish Fundability?
Establishing fundability requires establishing your business and then working on credit-building activities.
Establishing Your Business
Lenders are more likely to view established businesses as fundable. The following activities are usually required to conduct business legally. They have the added benefit of establishing a foundation for fundability.
Determine your business Structure: Decide if your business is a sole proprietorship, partnership, LLC, or corporation (S-Corp or C-Corp). Then, you’ll legally establish your business entity.
Contact Information: Establish a business phone number and mailing address. In today’s digital world, having a website and email address would also be best. Creating business profiles on social media channels can also help.
Obtain an EIN: Getting an Employer Identification Number (EIN) helps further establish your business and separate business and personal finances. This will also help with building business credit as commercial credit bureaus typically use your EIN for your business credit profile the same way consumer credit bureaus use your social security number (SSN) for your personal credit profile.
Get a business bank account: Having a business bank account enhances your credibility and helps keep personal and business finances separate. Many lenders want to review business bank statements to verify revenue and cash flow. Also, lenders often disburse small business loan funds to your business bank account.
Obtain Business Licenses and Permits: In most cases, you’ll need a business license to operate your enterprise legally. Depending on your industry and state or local government regulations, you may require various permits or additional licenses. Lenders may request this information as part of your documentation when you apply for a small business loan.
Building Business Credit
Once you’ve established your business, the next step is to begin using and building business credit. While your personal credit score is also vital in determining business loan eligibility, having a high business credit score can significantly increase fundability. Consider using some of the following activities to establish and build business credit.
Tradelines: Supplier credit is a valuable strategy for building business credit as it demonstrates a track record of timely vendor payments. A business can establish a positive credit history and potentially qualify for higher credit limits by consistently paying invoices on time. Additionally, utilizing supplier credit can help improve cash flow by allowing for extended payment terms.
Business Credit Cards: Business credit cards can be a valuable tool for building business credit as they allow for separate tracking of business expenses and payments. By using a business credit card responsibly and making timely payments, a company can establish a positive credit history to help secure better future loan terms and other financial products. Additionally, a business credit card can help improve the company’s credit score over time.
Lines of Credit: Building business credit using lines of credit involves establishing a track record of responsible borrowing and repayment. By consistently using and paying off a line of credit, businesses can demonstrate their creditworthiness to lenders and potentially qualify for larger credit limits. It’s essential to manage lines of credit wisely to build a strong credit profile for the business.
How do Business Credit Reports impact Fundability?
Lenders carefully review business credit reports when evaluating loan applications. These reports provide insight into a business’s financial health, including its payment history, credit utilization, and overall creditworthiness.
Lenders use this information to assess the risk of lending to a particular business and determine the terms of the loan, such as interest rates and loan amounts. A strong business credit report can increase the likelihood of approval for a loan, while a poor report may result in higher interest rates or even denial of the application. Therefore, maintaining a positive business credit profile is crucial for achieving fundability for your business.
How do Small Business Lenders determine Fundability?
Lenders determine fundability based on several factors. Here are the primary credit criteria that lenders consider.
Credit Assessment
Lenders evaluate credit history and credit score to assess eligibility for small business loans. This information helps them gauge the borrower’s financial reliability.
Business Credit: Business credit scores play a crucial role in determining loan eligibility as they provide lenders with an indication of a company’s financial health and creditworthiness. A strong credit score can increase the chances of securing favorable loan terms, while a low score may result in higher interest rates or even loan denial.
Personal Credit: Personal credit scores also play a crucial role in determining business loan eligibility. They provide lenders with insight into the borrower’s creditworthiness and ability to repay the loan. A higher credit score typically indicates lower risk for the lender, increasing the chances of approval for a business loan.
Financial Stability Evaluation
Small business lenders scrutinize a business’s financial stability, analyzing factors like revenue, cash flow, and profitability. These metrics influence the loan amounts offered to businesses.
Debt Service Coverage Ratio (DSCR)
The Debt Service Coverage Ratio (DSCR) is crucial in determining a business’s fundability, indicating its ability to generate enough cash flow to cover its debt obligations. Lenders often use the DSCR as a key metric to assess the risk of lending to a business, with a higher ratio typically indicating a lower risk for the lender. Businesses with a strong DSCR are more likely to secure financing at favorable terms.
Time in Business
The longer a business has been in operation, the more established its financial track record becomes, which can positively impact fundability. Lenders and investors often prefer to work with companies with a proven history of generating revenue and managing debt over time. Additionally, a longer time in business may indicate stability and longevity, reducing the perceived risk for potential funders.
Collateral
Collateral is also a factor in determining a business’s fundability as it provides lenders with security if the borrower defaults. The value and type of collateral offered can significantly impact the terms and conditions of the funding, influencing the amount that can be borrowed and the interest rate charged. In some cases, business owners may have to sign a personal guarantee.
What Business Loans can I get with Fundability?
Fundability can vary significantly between various lenders and business loan options. Traditional lenders, like banks and credit unions, often have much more stringent eligibility criteria. Alternative lenders are usually more lenient in credit criteria as they use fintech tools to determine fundability based on a more holistic view of your business.
The following loan programs are available through our network of lenders.
Business Term Loans
- Loan Amounts: $10k – $5 million.
- Factor Rates: Starting at 1-4% p/mo.
- Terms: 3 months – 5 years.
- Funding Speed: 1 – 3 business days.
Business term loans are a type of financing in which a business borrows a lump sum for a specific period, typically with a fixed interest rate and monthly payments. Businesses commonly use these loans to fund significant expenses such as equipment purchases or expansion projects. Repayment terms can vary, but they typically range from one to ten years, providing businesses with flexibility in managing their cash flow.
Approved businesses we work with typically have the following minimums to achieve fundability:
- Credit Score: 550+
- Annual Revenue: $75k+
- Time in Business: 6+ months.
Business Line of Credit
- Loan Amounts: $1k – $1 million.
- Factor Rates: Starting at 1% p/mo.
- Terms: Up to 36 months.
- Funding Speed: 1 – 3 business days.
Business lines of credit are flexible financing options that provide businesses with access to a predetermined amount of funds (credit limit). They can be used for various purposes, such as managing cash flow, purchasing inventory, or covering unexpected expenses. Business lines of credit are typically revolving, allowing business owners to borrow, repay, and borrow again up to the approved limit. These credit lines benefit businesses looking for ongoing financial support without needing to reapply for a loan each time they require funds.
Approved businesses we work with typically have the following minimums to achieve fundability:
- Credit Score: 625+
- Annual Revenue: $200k+
- Time in Business: 6+ months.
Equipment Financing
- Loan Amounts: Up to $5 million per piece of equipment.
- Factor Rates: Starting at 3.5%.
- Terms: 1 – 10 years.
- Funding Speed: 3 – 10 business days.
Equipment financing is a common option for businesses looking to acquire machinery, vehicles, or other necessary equipment without making a significant upfront payment. This type of financing allows companies to spread out the cost over time, making it more manageable for their cash flow. Additionally, equipment financing often comes with tax benefits that can help offset the cost of borrowing.
Approved businesses we work with typically have the following minimums to achieve fundability:
- Credit Score: 600+
- Annual Revenue: $250k+
- Time in Business: 1+ years.
Invoice Factoring
- Amounts: $10k – $10 million.
- Factor Rates: Starting at 1% p/mo.
- Terms: Up to 24 months.
- Funding Speed: 1 – 2 weeks.
Invoice factoring is a financial practice where a company sells its accounts receivable to a third party at a discount. This provides immediate cash flow for the company without waiting for customers to pay their invoices. It can be helpful for businesses looking to improve their cash flow and manage working capital effectively.
Approved businesses we work with typically have the following minimums to achieve fundability:
- Credit Score: 550+
- Annual Revenue: $250k+
- Time in Business: 1+ years.
Merchant Cash Advance
- Amounts: $5k – $1 million.
- Factor Rates: Starting at 1-6% p/mo.
- Terms: 3 – 24 months.
- Funding Speed: 1 – 2 business days.
Merchant cash advances are a form of financing where a business receives a lump sum payment in exchange for a percentage of future credit card sales. This alternative funding option is often used by businesses that need quick access to capital but may not qualify for traditional loans. While merchant cash advances can provide fast funding, they typically come with higher fees and factor rates than traditional loans.
Approved businesses we work with typically have the following minimums to achieve fundability:
- Credit Score: 550+
- Annual Revenue: $120k+
- Time in Business: 4+ months.
Revenue-Based Financing
- Amounts: $5k – $5 million.
- Factor Rates: Starting at 1-6% p/mo.
- Terms: 3 – 24 months.
- Funding Speed: 1 – 2 business days.
Revenue-based financing is an alternative funding option where a company receives capital in exchange for a percentage of its future business revenue. This alternative to traditional loans allows businesses to access funding without taking on additional debt.
Approved businesses we work with typically have the following minimums to achieve fundability:
- Credit Score: 525+
- Annual Revenue: $120k+
- Time in Business: 4+ months.
SBA Loans
- Amounts: $50k – $5.5 million.
- Factor Rates: Starting at Prime + 2.75%.
- Terms: 10 – 25 years.
- Funding Speed: 8 – 12 weeks.
SBA loans offer low-interest financial assistance to small businesses. These loans can be used for various purposes, such as starting a new business, expanding an existing one, or recovering from a disaster. The SBA loan program is popular among entrepreneurs due to its favorable terms, flexibility, and backing from the US Small Business Administration.
Approved businesses we work with typically have the following minimums to achieve fundability:
- Credit Score: 650+
- Annual Revenue: $360k+
- Time in Business: 2+ years.
What are the benefits and drawbacks of Small Business Loans?
Small business loans offer essential funds for growth, helping businesses expand operations, buy equipment, and hire staff. They provide financial support for new ventures.
However, small business loans have drawbacks. You must pay interest, and high interest rates can significantly increase costs. Strict repayment terms may strain cash flow, impacting business operations. Defaulting on a loan can harm personal credit scores.
Business Loan Pros & Cons
Pros:
- Provide necessary funds for business growth.
- Assist in expanding operations.
- Aid in purchasing equipment.
- Help in hiring additional staff.
Cons:
- High interest rates.
- Strict repayment terms.
- Potential impact on personal credit.
- Risk of default if revenue is insufficient.
Frequently Asked Questions
Here are the most common questions about small business loan fundability.
Does my personal credit impact the Fundability of my Business?
Yes, personal credit can influence your business’s fundability, especially if you are a sole proprietor or have a small business without an established credit history. Lenders may consider your personal credit score when evaluating fundability.
What steps can I take to improve my Business’s Fundability?
The following actions can help you make your business more fundable.
Check Credit: Improving personal credit is crucial for enhancing eligibility when applying for business loans. Higher scores increase approval chances. Consider debt refinancing or consolidation to achieve a strong personal credit score.
Research Options: Exploring diverse financing options helps small businesses secure necessary funds. Compare terms, rates, and flexibility before deciding. Choosing the right financial institution can help you achieve fundability.
Prepare Documents: Meeting qualification requirements involves organizing essential documents and financial statements. Lenders assess these for loan approval decisions.
Is Fundability the same at every lender?
The criteria for fundability can vary significantly among lenders. Some may focus more on revenue, while others prioritize a minimum credit score.
When analyzing how loan amounts and financing options differ between lenders, it’s crucial to consider your business’s specific needs. While some lenders offer higher funds with longer repayment terms, others may provide quicker approval but with lower loan amounts.
Traditional Banks
Small business owners often face challenges with fundability at traditional lenders due to strict lending criteria, limited credit history, and lack of collateral. These factors can make it difficult for small businesses to secure a traditional bank loan, leading them to explore alternative funding options. Additionally, the lengthy application process and slow approval times at traditional lenders can further hinder small business owners’ ability to access bank loans.
Alternative Lenders
Alternative and online lenders typically have less stringent fundability criteria than traditional banks. This allows borrowers who may not meet traditional lenders’ strict requirements to access funding more easily. Alternative lenders often consider factors beyond credit scores, making them a more accessible option for a broader range of borrowers.
Can I get a Business Loan even if I have limited Fundability due to Bad Credit?
While having bad credit may limit your options, some lenders specialize in bad credit business loans. These lenders may offer alternative financing solutions with higher interest rates or collateral requirements to accommodate businesses with poor fundability.
Bad credit business loans through our lender network offer the following features:
- Amounts: $1k – $5 million.
- Factor Rates: Starting at 1-6% p/mo.
- Terms: 3 months – 5 years.
- Funding Speed: 1 – 3 business days.
While business loans for bad credit typically carry higher interest rates and shorter terms, they offer easy online applications and fast funding times. Some small business owners use these loans as bridge financing until they qualify for more advantageous loans.
Approved businesses we work with typically have the following minimums to achieve fundability:
- Credit Score: 475+
- Annual Revenue: $240k+
- Time in Business: 6+ months.
What is Fundability – Final Thoughts
Understanding fundability is crucial for entrepreneurs seeking funding or small business grants. By optimizing credit profiles, maintaining consistent financial records, and building strong business relationships, individuals can enhance their fundability and increase their chances of securing financing.
Continuously monitoring and improving fundability factors is essential to attract potential investors and lenders. Ultimately, a proactive approach to fundability can pave the way for long-term financial success and growth in the business world.
Contact us if you have more questions about fundability or to apply for a small business loan. Our alternative financing experts can help you find the best funding options for your business goals.
