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Small businesses provide 55% of all jobs, and 66% of all net new jobs since the 1970s. Although access to credit remains vital to small businesses across the country, obtaining credit became increasingly difficult after the 2008 financial crisis. Small businesses now have many more options to obtain loans, thanks to the growth of marketplace lenders and the expanding risk appetite of credit card issuers. If you own a small business and want access to affordable credit, you need to make sure you are prepared. Following these tips will make it easier for you to get approved for a loan at a lower interest rate.
All of these tips have one thing in common. Lenders want to see that you treat your business as a serious and separate entity from your personal finances. Far too many people do not have the discipline to separate their personal finances from their business finances. If you are not willing to do it, most banks and lenders will not be willing to work with you.
1. Set Up The Appropriate Legal Vehicle For Your Business
When you apply for a loan, the first place many lenders look is at the legal status of your business. If you don’t create the necessary legal structure for your business, you will likely find it very difficult to find a lender willing to work with you. Most small businesses decide to create an LLC, an S-Corp or a combination of the two. Once you decide which legal vehicle makes the most sense for you, it is relatively easy to incorporate online. Websites like The Company Corporation have been doing this for years. Once you create your entity, you will be able to obtain your EIN, which is like a Social Security number for your small business. Just as your Social Security number is used to build your personal credit history, your EIN can be used to build a credit history for your business.
2. Start Building Your Small Business’ Credit History With A Credit Card
Once you have a legal entity and an EIN, you can apply for a small business credit card. With most small business cards, you are personally liable. And the underwriting is largely driven by your personal creditworthiness. That is why you will need to provide both your EIN and your Social Security number when you apply. But, once approved, you will be building your small business credit history.
Small business credit cards offer a number of benefits. Like consumer credit cards, you do not pay interest if you pay your statement balance in full each month. So, you are effectively given a 25-day free line of credit that can be used as working capital. The best small business cards offer rewards. You can easily earn 2% or more cash back on your business expenses. And a small business card can help make sure that you segregate your personal spending from your business spending. Whether your are applying for credit for your business or trying to get through an IRS audit, a small business card can help you keep track of business spending and business expenses. Just make sure you don’t co-mingle your accounts.
There are some of the risks associated with small business credit cards. Although risk-based re-pricing is no longer legal with consumer cards, it remains perfectly legal with small business cards. That means credit card companies can increase the interest rate on your credit card at any time, including on existing balances. While small business cards can be great tools for managing your spending, they can get expensive if you need to borrow. In addition, you remain personally liable. Even if your business goes bankrupt, the credit card companies can continue to collect from you. To find the best small business credit cards, you can compare at sites like MagnifyMoney (my website) or NerdWallet.
Once you have a credit card, make sure you sign up for online banking.
3. Have A Separate Small Business Checking Account
Just as you should avoid putting business transactions on your personal credit card, you should avoid making business transactions in your personal account. Your business checking account data will be used by lenders to determine your cash flow. And make sure that you have a formal process to pay yourself a salary. Too many small business owners use the small business revenue as a piggy bank. Without a good payroll process, banks will start to worry. You should also sign up for online banking for your small business account.
4. Get Help With Payroll And Benefits
It has never been easier for small businesses to obtain affordable HR support. Companies like Zenefits were built to help small businesses manage payroll, health insurance, employee on-boarding and all of the other headaches that plague small business owners. Zenefits can also help small businesses look more professional with its suite of tools, letters and reports. For example, with one click you would be able to create a turnover report to share with your banker, if required.
5. Consider Quickbooks (Or Something Like It)
Software like Quickbooks (from Intuit INTU +0.26%) can help a small business generate income statements, cash flows and balance sheets that lenders will require. If you need help, Quickbooks has a national directory of accountants who are certified Quickbooks specialists. When you apply for a loan from many of the new marketplace lenders, you will be asked to link your Quickbooks account. The lenders are then able to receive your financial statements digitally. By having your accounts prepared, you will be ready to apply for credit.
6. Build An Online Presence
As a business owner, you should be on LinkedIn. And you may want to create a page for your business. If you have a restaurant, make sure it is on Yelp. Depending upon your business, you may want to create Facebook or Twitter TWTR +1.63% accounts. These tools can help you connect with your customers. But they will also help lenders establish the legitimacy of your business. One of the biggest risks that online small business lenders face is fraud. If they see your restaurant on Yelp, with a lot of reviews, they will have a high degree of confidence that you have a real operation.
A New World Of Borrowing
New small business lenders are looking to change the way small businesses apply for loans. At many of these new lenders, you will be asked to link your small business checking account, small business credit card, financial statements from Quickbooks and social media accounts. With all of that data, the lenders are then able to extend credit to you quickly. The more data you have, the better the terms of your loan.
But even with traditional community banks, these tips are critical. Banks are afraid of small business owners who do not separate their business and their personal finances. If you are able to prove that you run a profitable business, you will have a lot more access to affordable and timely credit.
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