COVID Funding Tips for Small Businesses

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In today’s economy, is it more important than ever before to understand and implement our COVID funding tips to help keep your business up and running.

The goal is to beat the odds and business failure statistics. As you know, up to 95% of businesses fail within 5 years, and now with COVID, most off-line business are not going to make it past the first year. 

The number one reason is lack of money, capital, funding or whatever language you want to use to describe that. It is amazing how many just think all those projected numbers on the business plan or excel spreadsheet are automatically going to happen because you wrote them out on a spreadsheet.

Your sales are not going to go the way you predicted. Most of the time, sales revenue is considerably less than anticipated. Sometimes, sales are better than anticipated and a scalability problem comes into play. Many times, you are looking for new partners, vendors, or opportunities to grow and those may not be working out.

The overall challenge is that you must understand the funding fundamentals just as well as you may understand your online conversion fundamentals or your sales presentation fundamentals. This is just a must.

Once you understand the funding fundamentals, you will be in a position to secure more funding to grow your business (or, in many cases, stay in business and beat the odds).

The first step is to stop using your personal credit cards for your business. If you have formed a separate legal entity, you should not be using a personal credit card. The entity should apply for a business credit card in the name of the entity.

That debt that shows up on the business credit card linked to your entity, under an EIN number, does not show up in the PERSONAL credit bureaus. That is important when it comes to protecting your personal credit score. Your personal credit score, even though some so-called “business credit experts” will disagree, is very important to the cash lines of credit that you will receive in your business. The challenge is that too many businesses start and stay too long on the path as a sole proprietorship and jack up their revolving debt, and that tanks their personal credit score. If you know any friends or business associates that are still operating as a sole proprietorship, have them call NCP ASAP, so they get off that track.

If you are not sure of your personal credit score, here are two places you can check it out for free: CreditKarma.com (free and no credit card required) or AnnualCreditReport.com is a centralized service for consumers to request free annual credit reports. It was created by the three nationwide consumer credit reporting companies – Equifax, Experian and TransUnion.

When you think of COVID funding, beyond the government’s help, do you think of cash lines of credit or do you think of vendor lines of credit? Most think of cash lines of credit, money you have access to, to spend on branding or marketing to grow. Vendor credit is a line of credit with suppliers of business services and solutions and, ideally, they report to the business credit bureaus (very important). Examples would include Officemax®, Shell Gas, and Home Depot®.

business credit card strategy

These allow you to buy supplies for your business and use their credit, vs paying cash. Cash flow management is a huge part of being successful in a business today. The benefit of having strong vendor accounts that report to the big three business credit bureaus, Dun & Bradstreet®, Corporate Experian® and Corporate Equifax®, is that it is a must to build a strong business credit profile.

A strong business credit profile is a factor that is looked at by many of the cash line of credit vendors. Perhaps more important is that when you have vendors that report to the big three, your business will develop a strong business credit profile, which will help when other JV partners, clients or vendors are checking you out for your credibility. This is a must to develop a strong business credit score and rating. Keep in mind that each of the big three have a slightly different approach in how they score businesses.

When business is going well with strong revenues is the best time to get more funding, for a couple of reasons. First, you will be more likely to get more funding when you do not need it, because the very reason you do not need it assumes your business and cash flow are going very well. The time to go to the bank is when you do not need the money. But waiting until things are falling apart will reflect in your numbers and no one will want to help you at that point.

Second, securing more funding when you do not need it is very smart, because if your business needs to expand quickly or has a month of slow sales, you have a cushion and plan to deal with that. That is just smart planning.

Another major factor in determining the amount of COVD funding your business will receive is personal deragatories (or negative marks on your personal credit).  This will likely become a more common issue in the next 1-2 years due to loss of income from the state shutdowns due to COVID. Many have gone through losing their home to foreclosure and even personal bankruptcy.  

Major derogatories: these are items that will cause most cash financing options for you to get rejected. These include bankruptcy that is not charged off yet (if over two years old, this is better), foreclosure, large debt settled or charged off, and excessive late payments (more than 2 or 3 30-60 day late payments).

If this is your situation, you will need to rebuild your personal credit quickly, over the next two years, and the best way to do that is to get five secured personal credit cards and use them every month – could be $10 per month on each card and pay down the balance every month. Why? This will now show as 5 different cards reporting every month and, over 12 months, that is over 60 items reported with on-time payments. That is a must. Here is a great resource for secured personal credit cards: http://www.creditcards.com/secured-credit-cards.php

The longer you have been in business and the more consistent your revenues are, the more funding options you will have. There are more funding options for a business that has been around for three years vs one that has been in business for one year.

Most banks will not let you apply for a business line of credit or business loan unless you have been in business for two or more years (some will after one year). A bank line of credit is based upon your gross revenue. It is usually 10-15% of your annual gross revenue.

If your business generates $300K in annual sales, you may not receive more than a $30K line of credit. Profitability is key to your business. I know you may be thinking, “If I was profitable, why would I need to be looking at more funding?” That, again, is the problem. Ideally, you would secure more funding when your business is profitable and you don’t need it!

When it comes to business funding, many are confused about the difference between a personal guarantee vs a personal credit check. There are some types of financing that will not require a personal guarantee, but will check your personal credit score to see if you have any major derogatories. It will show up as a soft hit on your personal credit profile (as an inquiry).

A personal guarantee means that if the business defaults on the loan, you are personally liable. There is a balance between minimizing personal guarantees and maximizing cash lines of credit.

A lender will lend more if you personal guarantee a loan or line of credit to your business. (A client may be concerned about the blend of personal credit check’s in relation to inquiries on their credit score, vs not having any).

Finally, you have to be careful of big claims on the internet – those online companies that promise $250K of unsecured credit to a startup business. That is just not going to happen. You already know you must meet certain criteria before your business will qualify for additional funding

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