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Finding money to finance a business is one of the biggest hurdles any business owner faces. In this series of articles, we’ll focus on how to prepare for financing, the different types of financing available for businesses, the paperwork you’ll need for loan applications and preparing financial forecasts for your business. This first article discusses how to prepare for finding financing for your business.

Getting Ready To Find Financing

Securing financing for your business takes a little preparation. As with most projects, securing financing often takes longer than you first anticipated. Plan accordingly and begin your funding efforts as soon possible. Put your financial house in order before you need the funds, as a mad scramble for funding to save your business is not the kind of scenario anyone wants to face.

Checking Your Credit History

You dramatically increase the odds of obtaining financing when you have a good credit rating. If you have poor credit, you’re viewed as a risk to lenders. Before you apply for financing, it’s a good idea to review your personal credit score. A credit score, generated by evaluating an individual’s credit file, can range from a low of 365 to a high of 850. A score of 680 or higher is viewed as good. If your score is less than 680, you should work diligently to improve your score. Until then, receiving a loan with good terms is unlikely.

Before you apply for a loan, get a copy of your credit report. Thanks to Congress, all U.S. adults are now entitled to receive one free copy of their credit report from each of the nation’s three credit reporting bureaus every year. Take advantage of your free report and check your credit before you begin seeking financing. To obtain your free report, visit www.annualcreditreport.com.

You can also contact the three credit reporting agencies (TransUnion, Experian, and Equifax) and request copies of your credit files, although you’ll be charged a fee. When you receive your credit reports, go through each one and identify any irregularities. Contact each agency and request that these irregularities be corrected. All three provide an online method for requesting a review of any information found in your credit file. Take advantage of this free and easy method to keep tabs on your credit file and correct any issues that might impact your score.

Practicing Your Pitch

Practice explaining your business model to people who can provide an unbiased critique of your presentation. Listen to their feedback. If they don’t get it, chances are neither will your loan officer (or your customers). It’s a good idea to use a video camera to record yourself describing the business idea. You can then improve your presentation before your meetings. You’ll be surprised at how quickly your presentation will improve with practice, along with the business idea itself. Also, your personal experience and character are key factors in securing financing for your business. When meeting with lenders or investors, make every effort to present yourself in a professional, courteous manner. Take the time to carefully prepare your paperwork and applications—spelling and neatness count.

Building a Support Team

Most funding decisions for your company should be made in conjunction with professional advisors. Good advisors will help you make the best decisions for your company. At the least, you’ll need two advisors:

• A good accountant is indispensable not only for developing a plan for funding your business but also for maintaining accurate accounting records and preparing proper tax filings.
• A business attorney is essential for establishing the correct form for your business. Make sure the attorney you select is well-versed in small business matters. Your brother-in-law might be a great criminal defense attorney, but he may not be the right attorney for your business.

Start building a network of contacts, peers and resources that you can turn to when you need answers—and vice versa. Networking is a two way street.

Funding a business is no easy task. If you’re like most entrepreneurs and business owners, quite a bit of your time is spent worrying about how to finance your business. When I was finding financing for my business plan writing software company, Enloop, securing funding took twice as long as I’d planned.

The next article in this series will discuss the common types of business financing available for businesses and the paperwork you’ll need for loan applications.

Cynthia McCahon - Founder and CEO, Enloop.com After years of providing business planning and development services for private clients, Cynthia became acutely aware that many entrepreneurs struggled to develop accurate business plans and saw the need for a free tool like Enloop. www.enloop.com | @cmccahon | More from Cynthia

Small business owners work hard.  They are the backbone of our economy.  They create jobs.  Our economy would be in really big trouble without these entrepreneurs.  They wear lots of hats.  They are almost always great people as well.  So they must be experts at knowing the details of credit and they must know exactly what lenders want to see and who the right lenders are for them…right?  Well, not exactly.  It’s unrealistic to think that a small business owner would know credit details such as how FICO scores work, how many scorecards are utilized with each generation of FICO, what are the main factors keeping them from an 800 FICO score, how can they fix those problems, etc.  It’s equally unrealistic to think that a small business owner would know which bank is the best fit for them based on their location, industry, profits, losses, credit, etc.  And what about the thousands of non-bank lenders?  Do we think a small business would be well-versed on who those lenders are and whether those options make sense for them?

Now that you get the idea let’s discuss the 3 biggest credit and financing mistakes that get made by small business owners.

1. Using credit cards the wrong way.  Statistically, according to the Meredith Whitney Advisory Group, 82% of small business owners use credit cards as a vital part of their overall funding strategy.  Credit cards are among the cheapest forms of financing that are available to small business owners.  After all, where else can you borrow money for 0% for 6-12 months?  But the problem is when small business owners use their personal credit cards or use the wrong business credit cards.

If you’re using a personal credit card or a business credit card that reports to your personal credit then each time you use that card you’re negatively going to impact your personal credit.  30% of your FICO scores are determined by your utilization or your balance on your credit cards in relation to your credit limits.  Unfortunately, you cannot get around this problem just by using a business credit card because each lender can determine if they report that activity or not to the personal credit of the borrower.  For example, Capital One is the most widely used business credit card in the US.  They have an aggressive marketing and advertising campaign plus they participate and give generous payouts in the affiliate marketing space (with companies like creditcards.com and bankrate.com among others).  The problem is that they also report all the activity for their business credit cards to the personal credit report for their borrowers.  Using the right business credit cards is what’s important for small business owners and very few of them do it right.

2. Not treating your personal credit like the asset that it is (or could be).  If you’re a small business owner and you want or need to borrow money to start, build, or grow your business then you’re likely going to go through a credit check as part of the underwriting process.  If your credit is excellent then you need to be committed to maintaining that as you grow your business.  We see people everyday who have spent several months or several years growing their business and now they have a chance to take their business to the next level if they can borrow some money but they have not properly managed their personal credit.  As a result they either cannot get their funding or they must pay excessive fees for expensive financing.  They didn’t think of their credit as one of their assets.  If you don’t think like this then there’s going to come a time when you’ll regret it.  This doesn’t mean you cannot grow a business if you have bad credit but give me one good reason why you shouldn’t care about your credit or give me one good reason why you shouldn’t work to improve your credit if it’s not good.  The only thing worse than having bad credit is doing nothing about it.  If your personal credit is an asset then keep it that way or make it an even stronger asset.  If your personal credit is a liability then do something to turn it into an asset.

3. Not building your business credit.  Is there any reason why you wouldn’t want your business to have a good business credit profile?  Keep in mind one fundamental thing about business credit.  It needs to be strategically built.  It doesn’t happen as organically as your personal credit gets developed.  With personal credit, it gets developed as you live your life basically.  Business credit building requires an experts guidance but can create very tangible benefits.  We hired a company to build our business credit and we have several non-recourse vendor lines of credit that are very valuable and that we use regularly.  Access to capital and the need for financing is a basic need for any growing company so this minimal expense should be built into your business plan as one of the key ingredients.   Companies like Corporate Credit Concepts are leaders in this space.

Taking action and execution are a couple of the primary traits that separate average leaders from great leaders.  Taking these steps will ensure that your business can borrow money properly and efficiently and ensure that you have the best possible chance of getting the financing you’ll need as you grow.  Keep living the dream!

Tom Gazaway - Founder and President, Hawkeye Management Tom is President of Hawkeye Management, a firm that specializes in unsecured business credit lines for small business owners. Through their pre-qualification process and detailed analytics, they match small business owners with lenders who will issue business credit without collateral. www.hawkeyemgmt.com | Facebook | @TomGazaway | More from Tom