How to Introduce Automation Into Your Small Business (And Make It Stick)

By Laura Lopez on May 10, 2018 

Previously, we’ve shared specific tools that accountants and small businesses can use to automate their workflows. By automating core accounting tasks, scheduling, and more, businesses across all industries can redirect staff time away from manually-intensive projects while simultaneously saving money. This is especially true for small- to mid-sized companies that are often strapped for resources at the same time they’re striving for growth. 

By making employees’ jobs faster and easier, a practice can accelerate growth through increased efficiency and strengthen its overall service. But how do you go about implementing automated processes? Don’t throw your staff into the deep end and expect them to swim. Below are some tips on how to ease into the practice of automation to make it stick. 

Establish a plan and contingencies

Before anything else, practices need a plan that spells out their end goals. For example, automating the backup of email attachments into Dropbox with a program like Zapier may be convenient, but a business must also ask related questions, such as how their team’s ability to easily retrieve the attachments will be affected? Will everyone have access or only a single point person? Will this make collaboration between teams smoother? And so on. Failure to establish a roadmap will likely result in miscommunication and crossed wires.

Identify areas of biggest need

One of the easiest ways to begin automating a practice is by identifying the exact areas within the company that need it the most. Quite simply, pay attention to constant frustrations. By first plugging the biggest holes in workflow, firms can alleviate their employees’ collective stress, increasing the chances of getting everyone on the automation train. And you’ll help your business run more efficiently, too.

Automate easier processes first

On the flip side, if a business is fortunate enough to not have gaping operational holes that demand immediate attention, they can start their automation journey by attacking easier processes first. Returning to the example above, backing up email attachments is one of the simplest activities to automate. Following this route will make the task of introducing further automation into the practice less cumbersome and easier for everyone to incrementally grasp.

Start with a small test team

At the end of the day, you know your team best. If you anticipate that your automation roll-out might be complex or come with a steep learning curve, there’s no need to bog down the entire company all at once. Instead, form a small team who can test the software in advance.  

Project management automation software like Basecamp, for instance, is ideal for experimenting with smaller teams. By test driving it with only a few people, you can determine whether it would be a good fit for a particular department or the rest of your company. If this small subset feels like the software is clunky, unintuitive, or not user-friendly enough, then you’ve just saved time and effort that would go into rolling the program out to the rest of the company. Plus, if the test users prefer the software, they’re better able to provide support to their coworkers as software is adopted.

Evaluate process efficiency

Owners do themselves and their firms a big favor by evaluating the individual processes they wish to automate before they set forth in that direction. This involves raking over the process(es) with a fine-toothed comb to pinpoint flaws. Multi-directional feedback is key. Seek input from your employees, then, devise a process map to help every worker visualize the various processes in your company and highlights which areas need attention. If you skip this step and blindly press on, all the automated software in the world won’t fix your processes’ underlying inefficiencies. By taking stock of your business’s inefficiencies and initiating steps to correct them before committing to new software, you can reduce the risk of flushing money down the drain when you try and switch over to a new tool.

Conclusion

At its core, automation is about enabling and optimizing professionals’ work. However, automation tools can do harm as readily as they can help. The fault is not in the programs but in how they are used or if they “fit”. Companies that don’t take the time to understand which of their processes to automate, or who use software as a bandage for underlying dysfunctions in their processes, will likely decrease their efficiency. But by following the above tips on how to wisely use automation to optimize existing practices, owners can pave the way for fewer speed bumps and more growth. 

Technologies to Make Accounting Processes More Efficient

By Matt Goldman on March 19, 2018

Accountants, like everyone else, are constantly barraged by new programs offering a suite of features and tools that promise to make the workday a breeze compared to the old days. But which technologies can actually make a difference? After all, can’t you duplicate the functionality you need with some fancy formatting to an Excel spreadsheet and call it a day?

If only it were that simple. To raise your numbers-crunching game and work more efficiently, consider leveraging this newfangled tech. This list will get you up to speed:

Zapier:

Zapier connects apps and sends data back and forth between them by setting up “Zaps”, or automated digital tasks that function more-or-less like old-school macros. Zapier works with hundreds of different apps and can automate nearly any task.

Furthermore, Zapier can automatically generate an invoice whenever you fill out a form, including every time you receive a payment. Then, like magic, it can save your invoices back to your accounting software, presto-chango, storing all of your client’s transactions for future review. 

Client Portals:

Portal technology such as Clinked.com are secure, cloud-based accounts that enable you and your clients to safely store, transfer, and download files. Everything is guarded with bank-grade, end-to-end encryption for the ultimate in proven security. To further increase safety and protection, Clinked gives you permission controls that let you determine who can download what.

One of the best things about Clinked and programs like it? You cut out the hassle of sleuthing for lost attachments, files, or emails that go missing in cyberspace. Everything stays neat and tidy in central storage, removing one more migraine for both you and your clients.

Basecamp:

Project management tools like Basecamp upgrade not only your workflow but the overall synergy of your team and firm, too. You can view everything on a single page, whether it’s the work of the entire firm, specific teams, or even individual projects.

Basecamp employs a raft of tools to see your jobs through, including:

  • To-Do lists of completed and unfinished tasks 
  • Message Center to communicate with other members 
  • Campfire Room to host quick informal chats 
  • Docs & Files organizer to index all team materials 
  • Schedule for posting deadlines 
  • Automatic Check-ins to generate feedback from your team 

Basecamp is also very fluid, letting you customize projects according to its respective needs rather than being shoehorned into a one-size-fits-all approach. Each project is an adventure!

Recount:

Many professionals have decried the rise of AI within the accounting world, specifically the ethics of handling sensitive client data and the likelihood it could replace certain jobs in the industry. 

Still, others believe it a matter of time before AI is accounting’s new normal. One such program jumping on the AI revolution is Recount, a financial analysis tool that lets users securely upload client data. From there, Recount identifies trends, pinpoints issues, and make informed predictions of what might happen next with their clients’ finances.

Best of all, these tasks are automated and fulfilled within a matter of seconds. This may prove to make Recount and other AI-based accounting tools an indispensable–and perhaps inevitable–part of crunching numbers.

Once you pass the learning curve, these products reward you with fewer mundane tasks, increased organization, improved search, upgraded security, and more time to focus on the work that matters. Whether you’re in a team of five or a firm of 50, the above programs represent only a few of the means by which you and your colleagues can improve your working experience. Not to mention increase overall client satisfaction.

Stop. Writing. Billing. Code. Right. Now.

Doug Breaker here, CEO of EarthClassMail.com. Writing billing code is hard. Really hard. If you’re wrong by a penny, you’re all wrong.

I used to write billing code as a young developer.  I once made a mistake that cost a client $1,200,000! Oops, not my best day.

Any business not in the business of writing billing code should not write billing code. Outsource it instead.   

I guarantee it will save you time, make your other development faster, and save your sanity. Spend time building your competitive advantage, not wasting it writing billing code.

At Earth Class Mail, we use Chargify (Full disclosure: Scaleworks owns both Chargify and Earth Class Mail.  We used Chargify well before Scaleworks bought them).   

When I ran HomeFinder, we used Recurly and liked it.   Stripe’s subscription functionality offers a ton of time savings and robust tool set.  Check them all out, all offer immense developer time savings vs. developing your own billing system.  

Repeat after me ten times, “we will not have developers spend time on billing code!”

CRITICAL TIP:  before you choose, ask yourself, “will we ever want to charge for something like ‘get 20 widgets for free on our $99 plan, and 40 widgets for free on our $149 plan and charge for widgets over those amounts?'”

If you answer “yes”, then keep reading for a MASSIVE difference between Chargify/Stripe/Recurly.    This one tip can save you months of developer time, make you more money, and launch your products faster.

Let me explain with two real world examples, one using Recurly, and one using Chargify.

Example 1: Offering Free Usage on Recurly

My wife runs a little site called MovingCompanyReviews.com.   The site lets consumers read 100% verified reviews from moving companies and get free quotes from them.   For example, check out all the reviews for Tampa movers or Orlando movers.  

Consumers can even get a free pizza on their move day if they find a mover through the site. Who doesn’t love pizza on their move day?


(Quick backstory: Before I took over as CEO of Earth Class Mail, I was CEO of HomeFinder. While at HomeFinder, we launched MovingCompanyReviews.com as an internal startup. After I left, Placester bought HomeFinder about 6 months later. Placester didn’t want MovingCompanyReviews.com, so we bought it from them.)


We offer a product to moving companies called “Review Advantage“.   For that product we email prior customers of moving companies and collect reviews on behalf of the moving companies.   

We offer the first bunch of customers to write a review per month a free Starbucks coffee. The product used to be manual, but we just launched an automated version.  We set out to offer different plans with different number of free coffees:

  • $19 per month includes 3 free customer coffees
  • $99 per month includes 15 free customer coffees
  • $299 per month includes 50 free customer coffees

After we hit the free coffee limit, we wanted to charge the moving company a certain amount per coffee.   Here’s how it looks to our movers:

Here’s how we set that up on Recurly:

  1. Set up a “Measured Unit” for free coffees
  2. Set up the pricing plans, including a billable add-on for the extra coffees.  Here’s the $19 plan.
  3. Write a bunch of custom billing code to do the following:
    • Keep track of how many free coffees we’ve given in a billing period
    • Report any coffees over that the free limit to Recurly
    • Reset the counter when a customer’s billing period renews

That’s not easy code to write!   We did it, but it took our developer about three weeks of hardcore coding time to get it correct, get automated tests in place, and get fully confident that it worked.

Recurly gives us a ton of benefit, and we enjoy using it.   Unfortunately their metered component functionality still required us to write complex billing code in order to give away a different number of free coffees by plan price point.   

We made the investment because it was worth it.   However, we’d much rather spend our coding time helping consumers find great moving companies.

Example 2: Offering Free Usage on Chargify

Here at Earth Class mail, we just launched a killer new check deposit/lockbox product on Earth Class Mail called CheckStream.    

If you’re a business that gets checks, it can revolutionize the way you deposit them and record payments in Xero or QuickBooks Online.   

You can deposit any sized check into any bank in the US without going through any application process, or worrying about per check credit limits.    

Once you deposit the check, you can record payments to customers & invoices right from our app into Xero & Quickbooks online.

We launched with three pricing plans, each with a different number of checks included.   

  • $99 per month includes  30 check deposits
  • $249 per month includes 125 check deposits
  • $499 per month includes 265 check deposits

If customers pass those limits, we charge $2 per check deposit on the first two plans, and $1.90 per check on the $499 plan.

Thanks to Chargify’s new price point functionality, charging for this is a breeze.   

Check out how easy Chargify made it to set this up:

  1. Set up our 3 plans, here’s the $99 plan.
  2. Set up our metered “check deposit” component, with the three different price points.
  3. Configure each price point to include the correct number of free check deposits, see screenshot below.  
  4. When someone signs up for a plan, set the correct price point on their subscription (we do this in our ordering code, but you can do it via the user interface as well).
  5. Ship it!   That’s it!  Since our app already tracks which plan a customer is on and reports check deposits to Chargify, we didn’t have to do anything else.

Notice the step we didn’t have to do?   Write complex billing code!    Magic!    

Chargify saved us weeks or months of development & testing time.  Instead of spending weeks or months coding & testing, we launched the new plans in days.  

So do you and your company a favor, don’t write billing code!   After having hands-on experience with various billing solutions, Chargify has been the clear winner for Earth Class Mail’s needs, but I encourage you to check out all the options before committing to a provider.

Going with any will save you development time and future tears when your custom billing code breaks.    

However, make sure you bump your current and future billing scenarios against each provider to make sure you don’t get sucked back into the swampy quagmire of billing code development.

Lastly, if you’re a business that gets check in the mail, check out our new check deposit service, it’ll save you bunch of time, get money in your bank account faster, and save you from keying in payments in Xero and Quickbooks Online.

The Path To More Billable Hours

Professional services businesses represent a huge chunk of the U.S. economy. Legal services alone account for nearly $250 Billion in revenues and over one million employed.

Many of these firms rely heavily on billable hours for their primary revenue stream. The story is basically the same whether it’s a law firm, CPA practice, management consultancy, or similar business. 

The problem is that so much of the day-to-day work that goes into these businesses isn’t billable. This rings especially true if it’s a solo-practice or small firm. 

It’s not uncommon to spend up to two-thirds of your time in a solo-practice working on non-billable tasks such as billing, accounting, and marketing to new clients.

Obviously, all those things are valuable. However, it’s important to understand where your time is best spent. 

For example, a typical attorney may bill in the $200-400/hr range. Is that half-hour they spend each day sorting through mail worth the hundreds lost in billable hours each week?

There is a path to reduce the non-billable work…

Download the white paper, Four Steps to Cut Back on Your Admin Costs & Increase Billable Hours

Five IRS Tax Tips for Expats with Small Businesses

This is a guest article by Hugo Lesser @ Bright!Tax

A lot of entrepreneurs choose to run their small business from abroad. For some it’s a way to get around work visa requirements, for others it may be a tax savings decision, and many are simply drawn to the expat lifestyle. 

Unfortunately for you, the IRS still needs to get theirs. If you’re a U.S. citizen, you need file a federal tax return each year.

There are a few critical steps you can take to minimize your tax liability, and several important considerations that are unique to expat tax returns.

Use your expat status to reduce tax liability

You’re not going to escape the IRS, but to their credit they are accommodating toward expats. 

There are some key exclusions that allow you to partially reduce or entirely eliminate your U.S. tax liability.

The most common is the Foreign Earned Income Exclusion (FEIE), form #2555.

The FEIE allows expats, who can prove that they’re living abroad, to exclude the first $100,000 (inflation adjusted) in earnings each year. 

The threshold for expat living abroad is as follows, per the IRS website:

“You are considered to live abroad if you are a U.S. citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period.”

If you’re in a foreign country with a higher income tax rate than the U.S., then consider the Foreign Tax Credit (FTC) form #1116.

With the FTC you can claim a dollar for dollar tax credit for any income taxes you’ve already paid abroad, and potentially eliminate your entire IRS tax bill.

Bonus: The FTC credits rollover for future use.

Deadlines still apply so you have until June 15th to file, with a further extension available until October 15th upon special request.

Single-member LLC’s are your wallet’s best friend

Limited liability corporations registered in the U.S. with a single owner are considered ‘disregarded entities’ by the IRS.

Huh? Well, that means they don’t require separate corporate reporting, and any revenue or expenses can be included on the owner’s personal tax return.

There’s a catch though, you need to “elect” to be considered a disregarded entity by filing a special form, form #8832 (#8858 in subsequent years).

Doing that allows you to use the personal exclusions mentioned above against your corporate profits.

The IRS knows your bank account balance

You’re required to report any foreign bank or investment accounts if the total value of their combined balances is over $10,000. 

Any bank account that you have control or signatory authority over qualifies, including small business accounts, even if the account isn’t in the your name.

For example: if you have a personal savings account and control over your small business account, and the two balances combined had a value of over $10,000 at any time during the tax year, you will need to file a Foreign Bank Account Report (FBAR).

Foreign banks report their U.S. clients’ account details to the U.S. government, so the IRS knows who should be filing. Penalties for not filing are substantial. 

If you ignore this requirement, you will get penalized. From the IRS website,

“For willful violations, the inflation-adjusted penalty may be the greater of $124,588 or 50 percent of the balance in the account at the time of the violation, for each violation“.

If business is good, the IRS wants to know

The Foreign Account Tax Compliance Act (FATCA) requires expats to report their foreign assets (not including tangible assets such as property) if they are worth a total of at least $200,000 at any time during the tax year.

Qualifying assets include savings and investments, and small businesses.

If your investments and the value of your small business pass this threshold, you should report them.

You’re still going to pay for Social Security

Sole proprietorships and single owner LLCs registered in the U.S. are required to pay Social Security taxes.

If your business is registered abroad on the other hand, you aren’t.

Certain countries have Totalization agreements with the U.S. A totalization agreement means that you won’t be penalized with a requirement to contribute to two separate social security programs.

There are dozens of countries that qualify including, but not limited to: Australia, Canada, Denmark, France, Germany, Ireland, Japan, Norway, Poland, South Korea, and the United Kingdom. 

You can view a complete list of Totalization Agreements here.

In countries with Totalization, you can opt to have your foreign social security taxes credited toward your U.S. future social security benefits.

Wrapping up…

Filing U.S. taxes as an expat small business owner can be complex, and this article is not comprehensive.

The IRS offers an overview of the rules and required forms, just remember that mistakes can be costly.

As with anything tax related, consult a licensed professional for your specific needs.

Small Business Credit Building – Part 2

In Part 1, we reviewed the table stakes for getting past that first underwriting stage in the SMB loan qualification process. You’ll need to go through those steps at a bare minimum just to comply with automated qualification requirements.

This edition is all about establishing a business credit history in preparation for a loan.

It’s a lot like building personal credit history – there are credit reporting bureaus, payment history, credit utilization, and account age factors to consider.

A few key differences:

  • Unlike personal credit scores, which range from 300-850, business credit scores usually range from 0-100 (Equifax is different). 80+ is considered “very strong”.
  • Experian, the largest business reporting bureau, will open a report for your business based on public records data. As soon as you complete your corporate formation and get any vendors reporting, they will open a file on you.
  • Certain ratings agencies, like Creditsafe, will provide credit limit recommendations – that is, advising on how much credit your business should have outstanding at any time.

Let’s jump right in…

Establish A Business Credit Profile

There are actually several credit reporting bureaus that you will need to actively manage, and it’s all part of building up the right business credit profile.

It’s not unlike personal credit building, except that business credit is much more precise in its tracking. For example, personal credit reporting is based on 30 day increments.

So if you pay your personal credit card bill 29 days after it’s due, you’re on time. If you pay 10 days before it’s due, you don’t win anything.

With business credit, reporting is done to the day. Paying early actually has a marked advantage, and paying late by even a day will hurt you.

Experian Smart Business credit file

Experian is the biggest and easiest to get started with. Their reporting guidelines for vendors are the most open, so you can build up a history quickly.

Setting up your Experian Smart Business Report is free. They are used by a wide variety of lenders to make decisions.

The majority of commercial banks, leasing companies, business credit cards, and many trade vendors report activity and trade lines to Experian. 

If you can’t find a file for your business yet, one will be available within 30 days of the first payment reported.

There’s a very detailed FAQ on the Experian Smart Business Report here.

Creditsafe business credit file 

Creditsafe is the largest global business credit agency, but new to the U.S. scene.

Regardless, over 10,000 creditors and lenders already rely on them for evaluating business loan qualification. There’s a very strong chance your lender will look at this report as well.

Unlike other bureaus, Creditsafe also provides credit limit recommendations to lenders. That is they recommend the total amount of outstanding credit that your business should have at anytime. 

Dun & Bradstreet DUNS number and open file

D&B tends to be considered the go-to source for Net-Terms credit reporting data. Which is great if you have access to trade lines with vendors.

D&B won’t issue a DUNS# or D&B rating until you interact with them directly. You’ll need to first request a DUNS#, the free path takes 15-30 days for them to setup.

You can also sign up for their credit builder product to expedite everything, and get access to your PAYDEX score as an added bonus.

You’ll have another score to monitor here. Unlike the other credit bureaus, D&B uses a PAYDEX score to provide instant creditworthiness feedback to lenders.

A PAYDEX score of 75 is considered, by many, the minimum to be qualified for the best business financing opportunities.

If you just pay all of your business trade and credit lines on-time, that is within the terms established for each line, you will get a score of 80.

PAYDEX rewards you for paying early, averaging payments 30 days earlier than required is the only way to reach a perfect 100. It’s also worth noting that each credit line is weighted, so frequent big payments will carry more weight than infrequent small payments. 

Equifax Small Business credit file 

Most U.S. banks and business credit cards underwritten by banks report to Equifax. Equifax is typically slower to open a file on your business than other bureaus.

Like the other bureaus, your Equifax Small Business Credit Risk Score is determined heavily by timely payments. Equifax is not very open about all of the factors that go into the score though, so it is a bit of a black box.

The score itself is on a scale of 101-816, with higher equal to less credit risk.

The Equifax report also provides lenders with a Business Failure Risk Score. On a scale of 1000-1880, with higher scores equal to lower risk. This score is paired with a “class”, 1-5 with 5 being most risky, and a percentile.


Money in the bank

Your business banking history is tracked, scored, and relevant to your creditworthiness. It’s commonly called a “bank rating” and you’re graded on a graduated scale.

The bank rating scale is based on the average balance in your account for the last three months, and it takes into consideration any adverse history such as bounced checks.

Lenders want to see that you have enough cash on hand to service debt, that you’re using it responsibly, and that you’re keeping a cushion.

A “low 5” rating is usually what lenders want to see when you’re applying for a loan. To be in that range, you need at least $10,000 in the bank on average for three months and no adverse activity on the account.

This tends to be a non-negotiable condition for lenders.


A line of credit from a vendor

Well, you actually should aim for at least 5. That seems to be the magic number to establish your business and ease lenders’ concerns.

A line of credit from a vendor is basically the ability to pay a vendor on Net terms, usually 15, 30, 60, or 90 days. That means, you get something from the vendor and the net balance is due X many days after you receive the vendors service or product.

It’s actually pretty easy to set these up for common business purposes. Frankly, you might have some already and not even know it. Many business supply companies, like Grainger, will extend small trade lines of up to $1000 to any real business with an EIN and a DUNS#.

The key factor to remember here is that these are only impactful if use the trade line consistently, monthly, and pay it down in full each month…on-time.

Business credit cards

Revolving credit accounts are a powerful tool to build your business credit rating, just like they are with personal credit. 

Once you have your credit files open and vendor trade lines reporting, you can begin applying for business credit cards.

The business credit cards you want are just those that report to your business credit profile, and are in no way linked to your personal credit file. 

Not all business credit cards will report to just your business credit profile, so be selective. Some may require a personal guarantee, which is OK to provide in the beginning. 

A business loan from a bank

You might be asking yourself, “do I need a loan to get a loan?”. The answer is no, you don’t.

BUT, if you want to expedite building your business credit history AND increase the odds of securing a more substantial loan amount with better terms, then this is important.

It’s not a catch-22, you can get a low-value business loan pretty easily when it’s secured. That means you place a deposit with the bank in an interest bearing account like a Certificate of Deposit, in turn the bank will give you a loan for the exact value of the deposit.

You pay it off, then you close the CD and recover your payments. The net cost to you is just the difference in interest rates between what you earn on the CD and what you pay on the loan. Secured loans tend to carry low interest rates as well.

To take full advantage the loan has to be in your business name and using your business EIN, with payments coming from your business bank account. Early payments help expedite your credit building as well.

If you think this feels like cheating, it’s not. Secured business loans are common, here’s an offer page at Bank of America.

There are lots of legitimate reasons for a secured loan, and building your business credit is one of them.

Wrapping It All Up

Taking the above steps will get you on track to secure a more substantial business loan within as little as 1 year. In the next article, we’ll discuss a Small Business Administration specific requirement, the SBA business plan.

Avoid The Top Small Business Financing Mistake

We’ve written a bit before on the best options for small business financing sources. This time we’re going to focus on clearing that first hurdle for a small business loan.

At some point your business financing needs will outgrow the most common sources, namely cash. Whether that’s coming from personal savings, friends, or family – that well will run dry.

Let’s Review A Bit, Equity vs. Debt

Equity financing is a great option for a growth focused company, especially those with valuable intellectual property or favorable market dynamics. You can get the capital you need and avoid the overhead that comes with servicing debt.

Globally, venture capital activity for the Americas exceeded $72 billion in 2016, according to KPMG. The average deal was in excess of $8 million…one more time, the average deal was in excess of $8 million.

Obviously there’s a lot of money floating around on the equity side of things, but the average deal size is also a really good indicator of the types of businesses that win these deals. That is, growth companies.

For the most part, your small business is not going to be competitive when it comes to equity financing.

On the other hand, debt financiers absolutely love working with cash flow (aka “lifestyle”) businesses.

Your local credit union, or a specialized business lender, is going to care much less about your ability to generate a 100x return when you sell the company and much more about the reliability of your cash flow.

All of that makes debt financing a very common source of small business capital for entrepreneurs. In 2016 alone, the Small Business Administration funded more than $17 billion in small business loans.

The average deal was worth a bit over $370,000, a figure likely to gel with the needs of most SMB owners looking for capital.

Interestingly, over $6 billion of those 2016 SBA loans went to new businesses, which is especially impressive. The average deal there was just under $330,000. Again, a much more likely scenario for the typical small business entrepreneur. 

The true beauty of debt financing is that it’s a mature and liquid market. Honestly, how many VC’s do you know? What about angel investors? 

Now think about how many banks are in your neighborhood.

The First Test Is The Most Important

With that maturity comes a lot of volume, the SBA alone did nearly 6x more deals than all VC activity in the Americas. As you’ll learn, there’s a very defined process for securing a business loan.

Nearly all business lenders will follow a similar process, and the first step of that is commonly referred to as “Lender Compliance”.

This tends to be automated by the lender’s pre-qualification system. It’s basically an algorithm programmed to score your business’ risk using a pre-determined set of parameters.

If it sounds a lot like a test, it is. It’s just not one that you would study for, but rather one that you have to complete before applying for a loan.

The vast majority of rejections happen at this very early stage, during the compliance process. 

There are twenty common lender compliance items to prepare for, we’ll focus on eight in this post that are all about legitimizing your business identity – the others will be covered in an upcoming post.

Most lenders will check some of them, but there’s no way to know in advance which items they’ll look at, so you need to cover all of them before you start.

Legitimize Your Business

1. A real, registered business entity with the state

That means you don’t operate as a Sole Proprietorship, but are registered with the Secretary of State as some sort of Corporation, LLC, or the like.

This is a super easy thing to do. You can get it done online in under an hour for most cases, and the cost is generally a few hundred dollars.

There are plenty of providers out there happy to help you, including LegalZoom, USLegal, IncFile, and Incorporate.com just to name a few.

If you don’t have this done, you will be automatically rejected.


2. An EIN, or Employer Identification Number

This is basically the tax ID for your business. When a business is registered as some sort of corporation, you assign tax obligations to the business rather then a personal social security number.

You can complete this directly with the IRS, there’s no charge.

If you don’t have this done, you will be automatically rejected.


3. A bank account

You can’t use a personal one, and you’ll need to take care of 1. and 2. in order to set this up. The lender wants to see that you’re treating this as a real business, keeping the finances separate, and that the bank has cleared you for an account.

The longer your bank account is open, the better. Balance and transactions aside, account age is an important factor. The day you open the account is the day lenders will consider your business started.

For the most part this step is free, although you might need a minimum balance to avoid fees.


4. Business licenses

Everything that is required by the Federal government, state, county, and city will be required for your loan approval. The lender will ask you to detail what you have, along with the address your business is registered to.

Common Federal compliance requirements are liquor and firearms licenses, if you deal with either of those.

For state and local compliance you may have occupational licenses (e.g. financial services), agricultural licenses, pollution permits, weights and measures certifications, and the list goes on.

The SBA website is a great resource for additional information by state. Some of these will cost money, or require approval from an oversight body.

Lenders will confirm with each records-keeping body that all of the licenses and permits are active, and in good standing. If you’re missing any, you will be automatically rejected.


5. A real business physical address

The lender will check with the USPS on the type of address your business is registered to. It must come back as a “commercial” delivery point.

80% of business lenders will outright reject an application that is tied to a residential address.

Home based businesses are statistically more likely to fail, and they’re much less likely to have the right cash flow for debt servicing.

That also means no PO boxes, and no mailbox store addresses. Earth Class Mail street addresses will work for these purposes.


6. A unique phone number

A phone number that is not registered to your home address, personal SSN, or personal bank account will be required here. 

There are plenty of inexpensive solutions for this, you can cheaply lease a toll-free or local number from services like Grasshopper. Register it under your business name, use your EIN, and setup billing to your business bank account.

It’s not guaranteed that this will be a factor, but it’s any easy item to check off the list. 


7. Directory listing with 411

Yes, it’s still a thing. Lenders move slowly when it comes to changing their requirements for qualification, even though the world long ago moved on from calling into directories.

It’s a lot easier than it used to be though, VOIP numbers and cell phones will work for directory listing. So in this case, take care of 6. and then get your number listed for your business – make sure the listing matches your entity name or DBA.

There’s a free service for this, but you can also go directly through Whitepages or some carriers like Verizon.


8. A real website and business email domain

That’s right, businesses without websites and those that can’t be found easily via search engines are more likely to fail. Lenders will look at whether you have a website, and if your business email address is custom or branded.

Unfortunately, [email protected] is not going to fly. You need something business appropriate, like <first name>@<your website> to pass this check.

There are plenty of inexpensive solutions here. You can easily buy a domain for $10 per year, GoDaddy is a good place to start and there’s Google Domains as well, among thousands of other options. Setting up an email on your new domain just takes a few minutes.

On To The Next One

Consider 1-8 table stakes for getting consideration from a business lender. There’s really no way around them, you need to throw in some chips just to play.

Fortunately, it’s not all that expensive to fill in any gaps you may have. 

In the next post we’ll dive into the remaining items, all focused on establishing and building your business credit. Stay tuned!