- Cash flow and credit are the top two factors many lenders consider when evaluating applications for small business loans and financing.
- Cash flow indicates the ability to pay while credit represents the willingness to pay.
- Learn how to position your business for financing in 2024 and beyond.
It’s Still Possible to Access Capital in 2024
Interest rates have been rising. And some borrowers are finding it more difficult to get financing. Yet business owners in a variety of industries are successfully getting financing from lenders of all types, ranging from alternative lenders to traditional banks.
It’s vital to understand what lenders are looking for so you can position your business to get the financing it needs.
Target the Two Core Areas Lenders Scrutinize
Lenders want to be able to answer two main questions when you apply for financing:
- Will you repay the debt?
- Can you repay the debt?
If your business information helps them say “yes” to both questions, you significantly improve the odds your application will get approved.
We will show you how to do that here.
Access better funding options with a solution you can’t get anywhere else
Actively build business credit history, improve the metrics that matter, and access your best financing options – only at Nav.
Getting Funding Is Harder but Not Impossible
Some types of small business lending have seen declines, but funding hasn’t disappeared.
Bank loans have continued to decline. The Kansas City Fed’s Small Business Lending Survey reported that “new small business commercial and industrial (C&I) lending continued to decline in the second quarter, decreasing 16.8 percent from the same period in 2022 and 1.2 percent from the previous quarter.” The survey generally reflects lending by commercial banks to small businesses with less than $5 million in assets.
SBA loans continue to be approved by the U.S. Small Business Administration. As of December 2, 2023, the SBA has approved 57,362 7(a) loans (the SBA’s flagship loan program) and 5,924 CDC 504 loans for FY2023. That’s up from the 47,678 7(a) loans approved in FY2022, though down for the 9,254 504 loans approved.
While data on non-traditional business financing is hard to come by, Scott Wagstaff, Head of Lending at Nav, has facilitated approvals for many online loans and financing.
“The small business landscape today is so diverse, and the demand for a variety of funding products reflects that. That’s why Nav offers over 70 different financing products to ensure every small business owner has access to the right capital for their needs. In 2023, Nav helped almost 15,000 small businesses get financing.”
Core Components That Influence Lenders’ Risk Perception
When considering risk, lenders and other companies that offer financing typically consider a variety of factors:
- Cash flow
- Time in Business
- Use of loan proceeds
Of these, cash flow and credit are the two that often carry the most weight with the greatest number of lenders.
In the Small Business Lending Survey report mentioned earlier, for example, the Kansas City Fed reported that among banks that responded to the survey, “credit standards tightened while credit quality continued to decrease, and interest rates generally rose, consistent with the current rate environment.” In other words, banks are carefully scrutinizing credit for those types of loans.
While you can’t quickly change the length of time your business has been operating, or the industry in which it operates, you may be able to improve cash flow and credit in a relatively short period of time.
Pillar #1 – Establish Robust Cash Flow
Cash flow, along with healthy income, help demonstrate the capability of your business to repay your debt. Showing lenders you have the financial capacity to repay financing is one of the most important factors when it comes to qualifying for loans.
Why Cash Flow Matters Most to Lenders in 2024
Strong revenues and positive cash flow help a lender understand whether your business is able to handle payments on new loans or business financing. A small business with healthy cash flow can afford to make payments, while a business with cash flow shortfalls is likely to have trouble making payments.
How To Maximize and Present Your Cash Flow
First and foremost, make sure you use a business bank account and avoid commingling business and personal funds.
Business revenue should be deposited into your business bank account, and business expenses should be paid from that account. (A business credit card or charge card is still ideal for paying business expenses; you can then make your credit card payments from your business checking account.)
Small business owners who accept alternative payment methods like PayPal, Venmo, or CashApp, should ensure money from sales that come in on those platforms also flows through the main business bank account. This makes it easier for lenders (and you) to view total revenue, and also makes it easier to track cash flow from the bank statement.
Don’t try to hide debt. If your business is repaying debt, make sure you disclose that debt on your application, if asked. If you don’t, and the lender discovers you have undisclosed debt—often through UCC liens or payments from the business bank account—your application may be declined.
Review your business financial statements to look for ways to improve cash flow by increasing revenues, reducing expenses, or both. Not only can this help improve the chances of getting your loan application approved, it can also improve your business financial health.
Types of Cash Flow Statements, What to Focus On
A cash flow statement, also referred to as a statement of cash flows, is an essential financial statement that provides insights into how well your business is doing both in generating cash as well as using it to pay operating expenses and debt.
A cash flow statement details cash flow from operations, investing, and financing. It can answer important questions about the businesses’ financial health such as:
- Can the business pay its loan and financing payments on time?
- Is there enough money available to cover operating expenses?
- Is there sufficient emergency funds for unplanned expenses?
Not all lenders will require detailed financial statements. While traditional lenders like banks or credit unions often require them, many online lenders or financing companies will review business business bank statements to understand how much money the business is bringing in, how frequently, and from how many sources.
They will then use their own internal underwriting to determine whether the business has enough cash flow to handle new payments, and how large a payment the business can afford.
Pillar #2 – Build Strong Business Credit
Credit history is another important qualifying factor for many types of financing. Strong credit can help your business qualify for more types of financing, larger loan amounts or higher credit limits, lower interest rates and more.
Importance of Credit Score and History for Businesses
Some business lenders check business credit reports or scores, some check personal credit reports or scores, and some check both.
And some types of financing, like accounts receivable financing, invoice factoring or business cash advances may not check credit, or may have low minimum credit score requirements.
It’s helpful to check your personal credit and business credit before you apply, so you’ll know what lenders will see when they do. By law you can get copies of your personal credit report once a year from each of the major credit bureaus at AnnualCreditReport.com, and there are numerous places to get your personal credit scores for free.
Nav, however, is the only source for detailed personal and business credit data in one place.
Exact Methods To Improve Company Credit Score
If your business has a low business credit score, it may simply be because you don’t have enough information reporting to business credit bureaus. Payment history is the single most important factor for every type of business (and personal) credit score.
To build good credit, you’ll need accounts that report to credit bureaus, and you’ll need to pay them on time.
With business credit, you can get these accounts (also called “tradelines”) from a variety of sources, provided they report to credit bureaus. The most popular tradelines for building business credit are:
Nav Prime also offers an easy way to build a tradeline. Nav reports your monthly payments for Nav Prime as a tradeline to all three major credit bureaus to help establish business credit and improve your business credit scores. Nav reports consistent, on-time payments for Nav Prime to all the major business credit bureaus each month automatically.
Customers who used Nav’s Detailed Credit Reports with tradeline reporting saw an increased business credit scores up to 50% in the first 3 months.*
Tips to Responsibly Manage Business Credit Cards
Business credit cards can be a great cash flow tool for business. They give you more time to pay for purchases, and most business credit cards report to business credit bureaus, which can help you build business credit.
It’s essential, though, that you pay on time. Late payments will hurt your business credit, and late fees can add up. Consider setting up automatic payments for at least the minimum payment to help ensure you don’t miss a payment. You can then always make larger payments to avoid running up balances and paying interest.
Bring Credit and Cash Flow Together for Lenders
Strong credit and strong cash flow together make for a business that’s attractive to lenders, suppliers, potential partners, or even buyers. Building both while you build your business will make it much more successful in the long run.
Anticipate Exactly What Banks Want To Evaluate
Some lenders will publish minimum lending requirements including:
- Minimum credit scores
- Annual revenues or average monthly revenues
- Time in business
- Acceptable or disqualified industries
But you won’t always see requirements clearly stated on lender’s websites. You should be prepared for a credit check as well as verification of key factors like revenues.
Business credit card issuers are a little different than other types of loans. To qualify for a business credit card, most issuers will check a personal VantageScore or FICO score, and will accept stated income from all sources, not just the business.
Synchronize Your Cash Flow and Credit
There’s a popular saying in business circles, “You can’t improve what you don’t measure.” If you are in a financial fog when it comes to your business, it’s going to be hard to make positive changes.
Understanding and monitoring your cash flow and credit is the first step to improving them.
There’s another reason to monitor both these metrics. They are often the first warning signs of problems, including personal or business identity theft, or a business that’s starting to struggle financially.
Proactively Address Weaknesses or Gaps
It’s always a good idea to understand the strengths and weaknesses of your business, whether talking about your position in the marketplace, or your business financial health.
You can then focus on finding opportunities based on your strengths, while improving weaknesses, instead of spinning your wheels in frustration.
Here are a couple of examples of how this can work.
If your business is a startup, you can assume it will be more difficult to get startup financing. While there are some startup loans, in reality it can be challenging to get financing in the first couple of years.
Instead of spending hours trying to find the needle-in-a-haystack bank that will give your business a startup loan, you may want to get a 0% APR business credit card and use that (carefully) to meet your initial working capital needs while you focus on bringing in revenue.
Or let’s say you’re a business owner with an ecommerce business that’s 2-3 years old and growing. Even if you’re making steady sales, you probably need financing to invest in inventory to help your business really scale up. Banks may not understand your business, or be willing to lend to what they consider a risky ecommerce business.
But inventory financing could give you the funds you need to meet demand.
Knowing your strengths and weaknesses helps you focus on what you can do now and lets you focus on growing your business.
Partner With Experts To Get Affordable Funding
There are dozens of different types of financing small business owners use at different stages of business growth, each with different eligibility requirements. Fortunately, you don’t have to become an expert in all of them. Instead you can partner with experts that can help you find financing your business can get.
Assess Financing Options Beyond Traditional Loans
There are many different types of financing available, and understanding your loan options can help you find the right for your business needs. These include:
- Business line of credit
- Term loans
- Equipment financing or leasing
- Business credit card
- Commercial real estate loans
- Invoice factoring or financing
- Merchant cash advances
- Vendor terms
- SBA loans
Many business owners will use more than one type of financing over the course of their business, and it’s not unusual to have a few types of financing lined up at any given time.
While some of the best rates are available on loans from financial institutions like banks or credit unions, it is often hard to qualify. The loan application process may be quite involved, and financial statements, business tax returns, or even a business plan, may be required.
Nav Can Help You Find Fast, Flexible Capital
Even if this feels overwhelming, don’t let it stop you from getting the financing your business needs. Nav can help you find financing based on your business data. View your top financial options from 160+ trusted loans and credit cards based on your business data. Save time and get insights into where your business stands now, as well as how to move it forward.
Compare Your Financing Options With Confidence
Spend more time crushing goals than crunching numbers. Instantly, compare your best financial options based on your unique business data. Know what business financing you can qualify for before you apply, with Nav.
Nav Prime May Be an Option for Your Business
Nav Prime provides the only streamlined path to better financing, and takes the guesswork out of how to get there with a suite of tools that can improve your business financial health. You’ll get:
Detailed Credit Reports. Get detailed personal and business credit data from multiple reports, so you can see all your relevant credit information and how lenders and credit issuers evaluate your creditworthiness. Monitor your progress as you build credit.
Tradeline Reporting. Nav Prime reports as a tradeline to all major business credit bureaus, helping to build and strengthen your business credit profile. The majority of customers that use Nav tradeline reporting at least a year continue to see positive business credit score changes.**
Cash Flow Tool. Monitor and analyze your cash flow across all your business accounts. Your Cash Flow Health Score gives you an instant look at your overall performance so you can make timely changes. Get low balance alerts and set safe limits.
*Based on aggregate data tracking Experian® Intelliscore Plus business credit scores after three months of having Nav tradeline reporting. Results will vary. Scores are calculated from many variables; some users may not see improved scores.
**Based upon the aggregate percentage of Nav customers with positive score changes, nearly 75% of customers continue to see positive business credit score changes across business credit bureaus by keeping their Nav tradeline at least a year.
This article was originally written on December 12, 2023.
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