As all entrepreneurs know, it requires a lot of money to start and run a business. Perhaps you won the lottery or had a wealthy aunt leave her fortune to you after her death—but for the rest of us, financing is the primary method for securing the money necessary to thrive in the business world. “Building a business in the modern world can be hard due to the fierce competition in all industries,” says Forbes. “This competition often forces small-scale businesses, who lack funding, to shut down. We all know the commonly told statistic that around 90% of startup companies fail within their first few years. Although this may sound daunting, it does not mean that all innovators need to abandon their business dreams—quite the opposite, really. Those individuals who are interested in the business world simply need to understand how much it costs to start up a business. By knowing the relative costs, they will be able to spend their money wisely and hopefully turn over more profits.” Yes, the diverse costs of running a small business add up quickly. The good news: there’s also a diverse collection of financing options available to most small business owners. They include: \tVenture capitalists \tAngel investors \tCrowdfunding \tGrants \tCommunity development finance institutions (CDFIs) While each of these options might work in certain circumstances, most small business owners also pursue the tried-and-true route of seeking small business loans. Popular options include SBA loans, term business loans, short term loans, business lines of credit, startup loans, equipment financing, merchant cash advances, accounts receivable financing, and business credit cards. Acquiring a Small Business Loan When you approach lenders for financing, they’ll base their decisions on numerous factors. For example, how stable is your industry? How successful is your business within your industry? How long has your business been in operation? While the decision’s factors range substantially, they all work cooperatively to help lenders determine if you’re likely to repay their money. You might use a similar approach if a friend asked to borrow your new fishing boat for the weekend—if that friend had a solid track record when it came to borrowing things, you’d be more willing to agree. Likewise, if your friend was financially stable enough to be able to replace the boat if disaster were to strike, you would feel much more confident handing over the keys. Here’s a breakdown of the key factors that can make you a more attractive borrower (of business loans, not fishing boats): Your Revenue The more incoming money you have, the more money that’ll be available to fulfill your financial obligations. Lenders will evaluate your records to see how stable your company has been and how that stability projects to the future. “One of the chief business loan requirements for a lender is to understand the trends in your business, especially how sales and cash flow have grown,” explains a financing guide from American Express. “Make sure you have accurate monthly financial statements from the past 2 years on hand. They will look at specific metrics like the current ratio, which is your current assets divided by current liabilities. If that ratio is greater than 1, it signals your company's ability to pay all its bills.” While the idea of boosting your revenue in order to give yourself better chances of loan approval might seem overwhelming, there are small things you can do to move the needle in a positive direction. For example, you should focus on collecting unpaid invoices to boost your cash flow. It’s estimated that the nation’s 1,000 largest public companies are owed more than $1 trillion collectively. Even if your business isn’t holding unpaid invoices worth 13-digit figures, you can certainly improve your finances by collecting more of this overdue money. “The cliché about the world not beating a path to your door seems to be doubly true when it's regarding people who owe you money,” says a financing software report from PCMag. “The reality is, if you don't track down payment for a service or product, then your customers most likely won't rush to fork it over on their own. This is especially true of smaller business owners or freelance operators. Luckily, great billing and invoicing solutions can remove a lot of the pain in the billing process, giving you more options for receiving payments and speeding up your tasks.” An automated invoicing system is a must in our modern world. Entrepreneurs typically face more obligations in a day than they have time to address, so you shouldn’t risk the chance that you might forget to send an invoice or follow up on those that haven’t been paid. Invoicing software is affordable and easy to use. By delegating this crucial business function to a computer, you’ll notice fewer errors and more efficient results. As an added bonus, you’ll free up valuable time that you can dedicate to other revenue-building efforts. You can further improve your invoicing by incorporating shorter repayment terms. This won’t work in all situations—but, when applicable, it allows you to get paid sooner and for the other party to cross the payment off their to-do list. Regardless of your chosen payment schedule, ensure that your terms are consistent and easy to understand. Strive to communicate with your partners and customers so clearly that it’s impossible for them to misunderstand. If any issues arise in the invoicing process, address them immediately. Some entrepreneurs shy away from conflict, leading them to put problematic invoices in a dusty corner of the office where they’re likely to be forgotten eventually. This avoidance perpetuates depriving your business of the money it deserves. Your Business Credit Score If you’re a baseball fan, you’re probably well acquainted with stats. Of all sports, baseball has the most trackable metrics that can be expressed in figures. Your credit score works in a similar fashion—it combines a select group of metrics into an easily digestible number that gives a representation of your business’s overall financial health. Credit scores take into account your business debt coverage, personal debt coverage, business debt usage, personal debt usage, business revenue trend, and personal credit. “Just as the bank reviews your personal credit score and credit history when you apply for a car loan or mortgage, creditors review your business credit score and history when your business applies for a credit product,” explains US News. “Your business score tells them how much of a credit risk your business poses based on past financial behavior.” Every respectable baseball player knows his or her stats, and you should likewise know where your business credit score stands. There are 4 main sources for your score: \tFICO \tExperian \tEquifax \tDun & Bradstreet It’s important to check your score on a regular basis with these reporting agencies. This will help you to know where improvements are needed and guide your strategies. You can get a free credit report from services such as Nav, CreditSignal, Credit.net, or CreditSafe.com. Be aware that your business credit score could get dragged down by factors outside of your control. Research has shown that many as 20% of Americans have mistakes on their reports, such as late payments or unpaid bills, that hurt their scores. Any time you discover errors, follow the directions located at the bottom of your credit report in order to submit a dispute. Additional suggestions for navigating the process are available in this report provided by the Consumer Financial Protection Bureau. If your business’s credit score isn’t as strong as it should be, you’ll still have chances to compete for small business loans—just know that your options will be limited to financing based on factors such as your daily business earnings or your future performance. Common options include business lines of credit, ACH loans, and merchant cash advances. Your Business Structure When small business owners talk about the benefits of various business structures, they often focus on the tax-related aspects. It’s true that structures such as partnerships, sole proprietorships, corporations, S corporations, and limited liability companies (LLCs) impact how your taxes are handled—but there’s so much more to the equation. “Of all the decisions you make when starting a business, probably the most important one relating to taxes is the type of legal structure you select for your company,” says Entrepreneur. “Not only will this decision have an impact on how much you pay in taxes, but it will affect the amount of paperwork your business is required to do, the personal liability you face, and your ability to raise money.” Given the far-reaching influence a structure can have on your business, it’s essential that you do your due diligence before making a selection. Here’s a closer look at the various options: Sole Proprietorship Just as it’s easier and more affordable to plan a solo vacation than to arrange trips for larger groups, those who singularly run their businesses will always have smoother experiences when using the sole proprietorship structure. There is less paperwork to complete, and the price for filing is substantially lower than for more complex structures, like a corporation. With sole proprietorships, you are the recipient of all the business’s profits. You’ll also be on the hook for all debts and losses—making it a high reward, high liability arrangement. Given the “going-it-alone” structure of sole proprietorships, lenders usually will be willing to approve financing only if your business is solid and your personal credit score is above average. Limited Liability Company (LLC) This is one of the most popular structures available to American small business owners. As the name suggests, it provides you with liability protection, meaning you won’t be as vulnerable to your business’s potential debts and losses. One of the other key differences between an LLC and a sole proprietorship is that LLCs can have an unlimited number of shareholders. Each of these members has a place at the table and can help make business decisions. If your business is an LLC, you will be in a prime position to seek most types of financing. Lenders might look at a multitude of factors during your approval process, including business performance, tenure, and projections. Partnership If there are certain people you want to go into business with, consider a partnership. This structure is relatively simple to set up, and the cost is favorable. There are 2 different types of partnerships available. First is a general partnership, where all the partners share leadership of the company and liability for its debts and losses. With a limited partnership, your other option, certain partners hold these full responsibilities and others can serve in an investor role that doesn’t include personal liability. There are undeniable advantages to these business structures. For one, it’s always nice to distribute the impact of business losses among multiple parties. But you should always be careful who you bring into your business’s fold, as lenders could look at the credit history of each partner when making their loan decisions. If one or more of your partners have red flags in their financial past, it could possibly lead to a rejection for the entire business. Corporation This structure is among the most labor-intensive and expensive to establish, but that effort brings some hefty benefits with it. With a corporation, you create a separate entity from you and any partners who might be involved. Your assets would be protected in the case of severe business losses because your business would be separate in the eyes of the law. A primary drawback to corporations that deters some small business owners: its structure sometimes requires you to pay taxes twice. You’d first pay state and federal corporate income tax, then you’d pay taxes on your personal filings for earnings you may have given to your shareholders as dividends. The ironclad legal structure of corporations can make it easier for you to pursue financing—for example, seeking a credit card for your business. Most small businesses are limited to a small business card, but you could apply for a corporate card as a corporation. The benefits of corporate cards include higher spending limits and more robust features. Approval of the card would also be predicated solely on your business’s credit, rather than your own personal credit. S Corporation If you like the benefits of corporations but are intimidated by the complexity involved in establishing one, check out S corporations. This structure provides a similar liability shield without a corporation’s tax intricacies and strict limitations on the number of shareholders. Like corporations, S corporations give you access to a broad range of financing. Applications are reviewed based on your business’s history and performance rather than elements of your personal finances. Each of these business structures has advantages and disadvantages—the responsibility falls on you to review each option carefully to see what aligns best with your business goals. Just remember to include the financing element in your considerations, as different structures can impact what options are available to your business. Given the high stakes of choosing the right business structure, it’s an ideal time to seek guidance from your mentor. The best mentors are those who have experience in your specific industry, thus enabling them to give proven advice that relates to your situation. “Industry analysts, consultants, employees, and good networking contacts can share their expert knowledge with you regarding particular situations and needs you may encounter,” says The Balance Small Business. “However, only a business mentor can truly share wisdom with you on an ongoing basis, and in a manner that can have a direct, positive impact on the growth of your business over time. The generic business advice you'll get from online publications will only go so far, and a good business mentor picks up right where that leaves off.” If you haven’t been able to find a good mentor from your personal and business networks, contact your local SCORE office and utilize their resources to find some candidates. Enhancing Your Business’s Complete Picture When you apply for a loan, the lender is required to make a decision based on the information available. It would be great if you could meet with the lender for a few informal lunches, allowing you to connect on a personal level and convince them of your strengths. Unfortunately, this isn’t feasible. Once you click submit on the application, the lender will study the documents and details you’ve sent and then make a decision—this is why it’s so important to pay attention to all the details. Every positive action you take on a single element of your business, such as correcting errors on your credit report to improve your score, will create a more compelling overall image of your business. For this reason, it’s essential that you proactively present your best self to lenders when financing is needed.