As a business owner, growth is perhaps always on your mind. Whether you are thinking in terms of scaling the business, achieving newer goals, or setting higher targets, growing your business requires funds. Of course, you need a sound business plan and an in-depth understanding of your industry, market, and customers – those are non-negotiable. But it is also a necessary requirement to understand the financial aspect of your business and leverage available funding options. After all, it takes money to make money. So let’s get down to the basics of business credit and funding to get you on the fast track to success.
What is business credit?
In essence, business credit is a company’s ability to purchase now and pay later. You’re probably familiar with the concept of personal credit, wherein the borrower has the option to repay the lender’s loan after a stipulated period with an added interest. Business credit, as the name suggests, is the same concept applied to a business context.
Does it have a measure?
Just like the personal credit score, a business credit, too, is assigned a score that influences whether you can secure loans to fund your business growth. This score is particularly important to traditional lenders like banks and other formal financial institutions. It serves as a snapshot of the company’s financial health, its borrowing history, payment track record, and the likelihood of repayment in the future. It helps lenders evaluate creditworthiness by giving them a glimpse into the company’s past, present, and indicative future regarding loans and repayment. So it always helps to have a high credit score; it tells banks that they can trust the company to pay their loan back!
How is this score calculated?
Several factors are considered when credit scoring firms – Equifax, Experian, or Dun and Bradstreet – calculate business credit scores. This includes the type and size of the business, loan and repayment history, bankruptcy claims, tax liens, how long the company has been in business, etc. This information is benchmarked against other companies, which means your business must always put its best foot forward. Any slip up reflects poorly on the score, causing a downward spiral that is hard, if not impossible, to recover from.
What score should you aspire to get?
Business credit scores range from 300-900. A score of 700+ is considered ideal. Your business might even get a loan on a lower interest rate as the lender is assured of getting their money back. On the other hand, companies with 500-700 might have to pay a slightly higher interest rate. Those scoring below 500 might face rejections or get loans that charge substantially elevated interest rates. However, this is usually true only for traditional institutions like banks and lending entities. There are several other legitimate funding options available today – like merchant cash advances, for example – especially for businesses with low credit scores. You can read more about these options later in the article.
What are the ideal ways to fund businesses?
Depending on the nature of your business, the amount you need, what you need it for, how long before you can repay, etc. certain types of funding might work better than others. It helps to be aware of all your options before zeroing in on the one that best suits your business. Here are some commonly used funding options:
- Loans – You could borrow from banks, online lenders, or even friends and family. While banks might need a great business credit score to move your loan application forward, online lenders might be a good idea if your score isn’t up to the mark. Borrowing from friends and family might be a risky bet as it can potentially strain your relationships.
- Grants – There are several government grants and financial assistance programs to help existing small businesses expand or get startup ideas off the ground. A quick Google search can help you find the right one.
- Merchant cash advances – This option isn’t technically a loan; it allows businesses to borrow money against future income from sales. Unlike traditional loans with a fixed term and an interest rate, merchant cash advances can be repaid with a percentage of future sales and can be availed with lower business credit scores too. Read more about merchant cash advances.
- Crowdfunding – You can get the good people of the interwebs to fund your business! Being a social media pro helps to create the required buzz, and you can run the campaign on sites like Kickstarter.
- Investors – Venture capitalists and private equity funds are great options for taking your business to the next level. They come with a wealth of experience too. However, in this case, growth might come at an ownership cost; investors will usually want a stake in the company, which means you might have less control over your business.