3 Tips for Startups to Achieve Financial Success

Guest post by Courteney Reed, Financial Industry Analyst at Credit Card Insider

Successfully growing a business is no small feat. It takes a great team, determination, and often a decent helping of luck. With so many things to contemplate, it is often hard to find a place to start seriously investing in your startup’s growth. Here are three suggestions:  

Separate your business and personal finances

As a business owner, you need to apply for an employer identification number (EIN) via the IRS website. This allows your business to build a credit profile and maintain a record of business transactions. Until you file your business as a separate legal entity, you could be held personally liable for all financial activities.

The sooner you establish your credit profile the sooner your business begins to build credit. Opening a business credit card and using it responsibly can help you track your expenses and profits, build your credit scores, and simplify tax filings. Conversely, mixing business and personal expenses on a personal credit card can quickly eat up your credit limit, causing a drop in credit scores and making it harder to apply for personal credit, such as car loans or mortgages.  

Consider these advantages of using a business credit card:

  • Separation of business and personal expenses
  • Higher credit limits than personal cards
  • Rewards like cash back, miles, points, and warranties
  • Potential to increase business credit scores for better business loan terms and high-tier business credit card rewards
  • Better cash flow management, allowing 20-30 days to pay business costs without interest

Finance To Fit Your Needs

Successful businesses often use outside funding to plan ahead for their business needs. Here are three tried and true options worth considering:

Small Business Loans

Small business loans provide access to capital before revenue streams begin flowing. Plus, by successfully managing a business loan, you’re increasing the potential of securing bigger business financing when it’s time to expand your company. Finding the right business loan may take time but you’ll have working capital you need to get off the ground.

Venture Capital Funding

Financing investors provide funding to startup companies that are believed to have long-term growth potential. This type of funding usually comes from wealthy investors, investment banks, and other investment companies, and ownership of a business is divided between the investors and the proprietors of the business. There are different platforms that provide a database of different investors looking to invest in new companies or promising business ideas, making it easier to find investors interested in your market niche.

Alternative Lenders

Alternative business funding is capital offered to small business owners by “non-bank” providers. Alternative lenders are particularly attractive to small business owners who don’t have an established business credit profile. 

Most lenders have their applications available online, making the approval a quick process. Their interest rates are typically higher, but if you need money in a timely manner, alternative lending might be the way to go. Typically lenders extend loan repayments from 6 months to a year, but depending on the type of loan you choose, you may not have to pay the money back until you actually draw from the provided funds.  

Leverage Software to Increase Efficiency and Reduce Costs

After getting approved for more financing, you’ll need to stay on top of all the financial details. The right software can help streamline multiple tasks and increase your team’s performance and overall efficiency. Here are three tools for keeping your finances in order:  

Effortless HR

Payroll management is often a burdensome task, especially as your business grows in manpower. Effortless HR is an HR tool that enables employees to self-manage their payroll preferences, time off, and access any other necessary information without the assistance of an HR employee.

Quickbooks for Finances

Quickbooks is simple to use and helps you keep track of all basic business transactions. Plus, they regularly roll out updates to their online platform for flexible financial management.

Dropbox

A cloud storage solution is a must-have for organizing and sharing important files. Depending on your specific needs, Dropbox contains tools that benefit secure record keeping and flexible collaboration.

Conclusion

The path to growing a successful business is not a concrete one. However, these three tips can begin to increase your financial literacy and day to day expense management in a simpler and more productive way. Seriously considering these recommendations will give your business a better chance of success and expansion in the future.

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!

Fund Your SMB or Startup The Right Way

At some point or another, most businesses need funding. Maybe you’re just starting out and living off credit cards. Or, maybe your business is in a slump and you need cash to pay everyone. 

It’s important to both know your options, and understand them enough to choose the best one for your situation.

Some Background

Earth Class Mail has a lot of personal experience with this. If you’ve done some searching, you probably found an article or two on the bankruptcy of a “once highly touted Oregon startup”, that would be us.

The most important lesson we learned, and one you can learn from, is not to take on too much debt even if it’s offered. 

The second most important lesson, is to clearly understand the type of debt you are taking on. You can read a little more about it in our CEO’s letter, and we’ll come back to it again in an upcoming series.

3 Basic Categories of Funding

Cash 

Bootstrapping, the badge of honor so many startup founders aspire to wear, is easier said than done. Few are lucky enough to have the savings to do this, and even fewer reach meaningful revenue before they run out.

The benefits of cash are clear. It’s interest free, it’s liquid (i.e. easily accessible), and you don’t have to give up equity. 

Cash definitely has its drawbacks too. You’re personally investing much more than you would via leveraging. If you don’t get profitable in time, you will run out of it.

Is this a good idea? It really depends on your run rate, how much savings you have, and reasonable expectations for the growth of your business. 

At a minimum though, if you have cash, you should build that into your funding model so that you don’t need to give up as much collateral or equity to other investors.

Debt

Probably the most common form of small business financing. To borrow money from an institution or individual you put forward some sort of collateral, then you agree on terms of repayment such as the interest rate and payback period.  

If you both agree then you get some money, and they get payments to cover the principle and interest every single month.

It doesn’t matter if your business isn’t profitable, or if you’re making money hand over fist. Those terms are locked in.

Debt financing is a complex field, but here are a few shapes it can take:

  • Family and friends 

It is often easiest to ask those close to you for small amounts of money, relatively that is. Make sure to draw up a formal agreement, no need for lawyers with apps like Shake

  • Credit cards

A common option for new entrepreneurs and freelancers because of the ease of access. It’s really only a good option if you have cash flow issues and can repay before the interest charges hit. 

If this fits your needs, many credit cards offer cash back so you can easily reduce overall expenses and get other benefits.

  • Peer to peer

It’s the 21st century after all. There are lots of notable services out there, like LendingClub.com, that will let you secure a personal loan from one or multiple individual lenders. They aren’t investors, you are establishing a lender-debtor relationship. 

  • Line of credit 

This can come either from a bank directly, or from a service like Kabbage.com. It’s a lot like a credit card, but with a much higher limit and generally needs to be paid down to $0 each month. 

The interest rate is likely adjustable, higher than a fixed rate loan, and payback terms are usually shorter than traditional loans.

  • A/R Lines or Factoring 

If you’ve managed to generate revenue, and have some recurring or expected payments coming from clients then you can leverage that to fill any gaps in cash flow. A great example of this is if your business signs up clients for contracts. 

It may take you a year to collect that revenue, but if you need money now you can take that to a lender and say, “give me a little bit less money now and I’ll give you my receivable later”.

  • Small Business Loans 

This is a big category, with lots of sub categories, but we’ll focus primarily here on Small Business Administration (SBA) and Traditional loans. 

There are lots of services out there that can take the hassle out of securing a loan, like Fundivo. The service is actually really unique in that it searches multiple lenders for proposals, then negotiates on behalf of your business for the best rates.

Whether you use a service or go at it alone, there are some important things to understand. Firstly, the SBA is a government organization that insures loans for small businesses, much like the FHA does for home mortgages. 

Because of that insurance, it’s a lot easier to secure an SBA loan. 

They have softer requirements and reduced rates. Traditional loans will be harder to secure, but can have preferential and more creative terms for established businesses. 

Most importantly, these types of loans are going to be collateralized. Meaning, some assets will be needed to guarantee repayment in case of default. Think of things such as cash on hand, equipment, and inventory.

Often times, small business owners will have to personally guarantee the loan. So the lender can come after your personal assets to collect on a debt if you default. 

That’s not meant to scare anyone away, but it’s a fact of how business loans work. It’s no different than your mortgage being secured by the title on your home, or you car loan secured by the title to the car.

Equity

This is the one that makes the headlines you see in your Twitter feed. It’s rare to see something like “new startup secures $100,000 SBA loan”, but you will see stories like “startup raises $50,000 seed round” almost daily.

There are a lot of reasons equity sounds sexier than debt financing, but that doesn’t mean it’s the best idea for every business. It can definitely be a reckless decision to give up equity and control of your company.

Investors do take on all the risk, but in exchange they become business partners. You share your profits, and make big business decisions together.

Equity financing is generally broken down to the stage of business maturity.

  • Seed

This is the earliest stage, often pre-product even. Usually founders at this stage have an idea, a strong business plan for their current stage, and a committed team. 

Investors at this stage are often considered Angels, as they are individuals with independent sources of capital. These rounds tend to raise small amounts of money, usually less than $100,000.

All of the product and team caveats aside, you are giving up a lot of equity here because the Angel is taking on a lot of risk. Angel investors will probably lose money on 90% of investments, but that one winner is worth the risk to them.

It could be a great idea for you, or it could be a big mistake. Giving up a ton of equity just because you don’t want to dip into cash might cost you millions in the end.

  • Series A

A company might skip seed funding entirely, or this could be a post seed round. Usually, this round will attempt to raise up to $5 Million and attract professional investors, both individual and boutique firms.

There are a lot of mistakes you can make here. Stock sales are nuanced, and lawyers are expensive. 

If you are trying to rapidly grow a company and don’t like the risk associated with debt, this could be a good option.

  • Series B, C & Beyond

Once a business has grown more established and needs to scale past a certain threshold, it will hold additional financing rounds. There is less equity at stake here, mainly because there is less risk and much of it has been given up already.

Usually a business has proven itself here and already achieved major milestones. This is also a time when most big Venture Capital firms will get involved, as they are looking to invest large amounts into high growth potential businesses.

Wrapping Up

The most important thing you can learn from this article is that you need to make prudent, clear-headed decisions about your financing options. Most businesses will blend these methods to hedge against the risk of each. 

If your business is just starting, slower growth might be ok. If you want rapid growth, but can’t secure an investor – ask yourself why? Don’t immediately turn to debt because it’s easier or more available.

Financing can help you grow a good business faster, but it can’t help a bad business succeed.