For years, I’ve been encouraging business owners to line up financing before they need it. Whether it’s a crisis or opportunity, you want to be prepared so you can respond quickly—and that crisis is now a reality across the country. For some businesses, this will also be a time of opportunity.
Aside from COVID-19 relief loans, funding is much harder to get, as you’ll generally need strong qualifications. Nevertheless, lending will come back, and when it does, you want your business to be in the best position possible.
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Here are a few steps you can take now to get your business ready for funding:
Set up a formal legal structure
If you’ve been operating as a sole proprietor, there is no legal distinction between you and your business. That means you’ll never be able to completely separate your personal and business credit. Talk with an attorney, accountant or other advisors to determine what legal structure— LLC or S Corp, for example—makes sense for your business, and then take steps to create it.
This also helps protect you from personal liability for the activities of your business, provided you properly maintain your corporate structure.
Use a business bank account
As many as one in five business owners don’t use a business bank account. Lenders are increasingly evaluating business revenues to make financing decisions, so you need a business bank account if you want to be considered for the more attractive types of small business financing. You can pay yourself out of the business, then use those funds to pay your personal expenses, but don’t use your business account as if it were a personal checking account.
Get your books up-to-date
Some small business owners who applied for COVID-19 relief loans, such as Economic Injury Disaster Loans (EIDL) or Paycheck Protection Program (PPP) loans, were faced with a wake-up call: they needed the information from their 2019 tax returns to successfully apply for funding, despite the fact that the deadline for filing those returns had been extended.
If you are serious about getting a good small business loan, your bookkeeper or accountant should be your best friend. You will want to keep your books up to date and be prepared to provide up-to-date financials as needed.
Get a small business credit card
If you’ve been using a personal credit card for business purchases, you’ll want to consider a small business credit card to officially separate your business purchases from personal ones.
Some business credit cards don’t report account activity to the owner’s personal credit (except if the account is delinquent), which can further help to separate your personal and business credit.
Create or update your business plan
Not all lenders will require a business plan, but many traditional lenders, such as banks, will. Even if a lender doesn’t request a business plan, the work you put into creating one will help you identify financing needs and opportunities. There are many good tools for creating a business plan, and you can get free help with yours through SCORE or your Small Business Development Center.
Know what you need
If you’re looking for financing to buy a piece of equipment or take on a specific project, then it won’t be difficult to figure out how much you need to borrow. But in many cases, when you’re trying to get financing for cash flow or working capital, it’s harder to figure that out.
Borrowing blindly can mean you’ll wind up with financing you can’t afford. If you don’t know how much you need to borrow, or how much you can afford to borrow, talk with your accountant or small business advisor.
Watch your credit
Even before the coronavirus crisis, just over half of business owners used either business credit or a combination of business and personal credit to get financing, according to Fed research.
Post-COVID-19, lenders are going to be even more cautious as they lend, and good personal and business credit will be more important than ever.
So, monitor your personal credit with each major consumer credit agency: Equifax, Experian and TransUnion. You can check your credit reports from all three at AnnualCreditReport.com.