If you are NOT a well established business (usually 2+ years) most loans will focus primarily on your personal credit rather than your business credit.

When providing a business with a loan, a bank will obviously need to see specific items to feel confident and secure that their loan will be repaid. The loan officer will review your credit history, business plan, financial statements, and much more. To simplify this process, most banks will use what they call the 5 C’s of Credit to determine your credit worthiness and approve a certain amount for your loan. The 5 C’s of Credit are Character, Capacity (Cash Flow), Capital, Collateral, and Conditions.

Character is defined with your credit history and ability to repay debt. The bank will look at credit reports from the three major credit agencies to see how much money you borrowed in the past and the payments on these loans (if any). These scores, which include your FICO Credit Score, will determine your credit risk or probability that the bank will suffer a financial loss from lending you money. Minimum credit scores will depend on the bank but the higher the score, the more likely you are to be approved with better loan terms.

Sometimes referred to as Cash Flow, Capacity is the ability to repay the loan by comparing the borrower’s monthly debt to their monthly income and looking at liquidity and cash flow statements. The debt to income ratio is simply calculated by dividing the total debt by the total income to get a percentage. The lower this percentage, the better, and most banks will look for around a 37% or less ratio to approve an application. Capacity could also factor in items like job security, cash on hand, and the stability of your income.

Capital is the money that the owner or team has already invested into the business, which makes banks more likely to approve a loan. You could also invest money in this loan via a down payment to provide extra security. With personal investments in the business, the owner has motivation to not lose their personal investment, so the bank feels more secure. Tools like business credit cards are great to help build this capital in your business.

Conditions are all about the general surroundings and circumstances of the loan. These may factor in internal conditions such as how you intend to use the money, how long have you been in business or employment, performance of industry, stability of the business, how much money is being asked, etc. They may also factor in external conditions such as the state of the economy, political and industry trends, interest rates, etc.

Collateral is something that the lender can get in return if the borrower can NOT repay the loan. Loans that are backed by collateral are usually considered secure (less risky) since the lender can repossess something of equal value from the borrower if the loan isn’t paid.

Requirements for funding options will differ based on where the money is coming from, banks are different from other banks, which are different from SBA loans and CDFI’s. Below we will highlight some of the general requirements you may have to prepare for a small business loan meeting:

These documents will confirm ownership of the business. Some of the documents may include: Articles of Incorporation or State Registration, Business Licenses, Commercial Leases, Legal Contracts & Agreements, etc.

A solid business plan will explain your business, map out the industry, project the future, create goals and outline a plan to reach those goals. While the financial aspect of the business will be most important, the business plan will create the foundation for the funding to be approved.

Financial documents will further prove your credit worthiness whether they are personal or commercial documents. Some documents may include: Personal & Business Tax Returns, Annual Revenue, 2+ Years of Balance Sheets, 2+ Years of Cash Flow Statements, 2+ Years of Profit & Loss Statements, Personal & Business Bank Statements, Financial Projections, etc.

Loan providers will want to see positive credit history that shows that you are and have been able to pay back debts. Some documents may include (or be provided by the bank): Personal or Business Credit Score (Typically 690+ Preferred), Any Scheduled Debt, Proof of Collateral or Personal Guarantee, etc.

While we listed a ton of documents you may need to prepare, there are even more that may be included in the loan process. These other documents may include: Drivers License, a Resume with Relevant Experience, Information on Stakeholders, Loan Proposal, Bank Account with Specific Lender, etc.

Crowdfunding is raising capital through contributions made by a group of people (i.e. a crowd), who often take advantage of digital channels to
promote the cause. It can be an alternative to typical business funding that doesn’t require a bank or third-party funding agency to complete the transaction. After placing your product or service on a crowdfunding site and setting a funding goal, the public can find your business and provide capital for a set fee.

While it can an amazing alternative to typical funding avenues, crowdfunding requires just as much work to run a successful campaign. Most platforms require you to meet a set funding goal before you are able to actually receive any of the funding. So when considering it as option you MUST be prepared to bring the CROWD portion of crowdfunding. In addition to having backers before you begin, most successful campaigns will have 30% of their funding goal completed in the first week.

Having a good business idea is NOT enough for a successful campaign. You should have a foundation of channels on social media, a solid email list, and a professional website prepared before you launch your campaign. Backers of the campaign should feel a deeper connection with your business/project if you even want them to consider funding. We also highly recommend high quality videos and photos that provide credibility to your business and highlight why the crowd should invest in the campaign.

Click on a link below to view the YouTube recording of one of our funding sessions:

Leveraging Grants & Crowdfunding

Navigating Business Financing with Confidence

The U.S. Small Business Administration has officially launched the Investing in America Resource Hub! On this page you may find the information you need to pursue federal, state, and local grants, contracts, and other funding:

Investing in America Resource Hub