Not too long ago I spoke with a small business owner who had a great idea, a really good business plan, but no income and a really bad credit score. He wanted to ramp up his business (which made sense), but he just wasn’t poised to make it happen.
Unfortunately, he misinterpreted the reluctance of a lender to invest in his high-risk credit profile as disinterest in his idea—which it wasn’t. No income, no track record, and no credit usually mean no loan. My advice to him is the same advice I’d give any small business owner in the same situation—and will likely put his small business in a better position to grow.
- Get a couple years under your belt: This can be a bitter pill to swallow. Anyone who watches the “Shark Tank” knows that all you need to do is find an investor who believes in you and you can get a bucket-load of cash to invest in your business, right. Unfortunately, very few small businesses are actually viable candidates for angel investors like the “Sharks”. Most Main Street businesses are going to fund growth with borrowed capital. And, even on the Shark Tank they want to know how long the business has been around, how many customers it has, and what the annual revenues are. The Sharks are usually very skeptical about investing in an idea with no track record and no revenue. If your business is younger than two years, it’s unlikely you’ll be able to get a loan at the bank. If you do a healthy amount of credit card transactions ($4,000 per month), you might be able to leverage the cash going into your merchant cash account for a loan, but you’ll need a credit score of 650 or better to do that. It’s been said “Time heals all wounds.” If you don’t have a large personal bankroll or friends and family interested in making your business come out of the gates at Mach 10, be patient, get a few years under you, and then position your business for growth.
- Don’t ignore your credit score: The goal should be a score of 700 or better. You should also be aware as a small business owner you have a personal and business credit score. Most young small businesses don’t have any business credit yet, so lenders look at your personal credit score. Most of the time, even after you’ve established some business credit, a small business owner will often be asked to sign a personal guarantee for any business credit. If your personal credit score is below 700, it’s time to work on improving your score. The first step is to check with the credit reporting bureaus Experian, TransUnion, and Equifax to make sure there aren’t any mistakes on your report. If not, you’ll need to spend some time repairing your credit by focusing on making timely payments and rebuilding your credit profile. I wish I could say there were shortcuts to this, but it takes time. I do know that if you focus on paying your bills on time for six months, you can likely improve your credit score by as much as 100 points.
- Do your homework: It’s far too easy to become a focus group of one and determine for yourself that your product or service will sell like hotcakes. Even companies that invest in customer research often make very costly mistakes. I like the outline suggested in the book Tuned In by Craig Stull, Phil Myers, and David Meerman Scott. Does your product or service fill a pervasive need in the market? Is it a problem your potential customers are willing to pay to solve? Is your product or service priced at a level where your customers will pay for your solution? I experienced this first hand in one of the businesses I owned. I solved a pervasive problem in the market and although my customers were willing to pay to have the problem solved, they weren’t willing to pay enough that I could profitably run a business. I assumed growth was the answer and pushed to grow, but that only made the financial problems worse. I wasn’t ready to grow because I hadn’t found a way to meet my customer’s needs at a price they were willing to pay. I hadn’t done enough homework. Eventually, I had to close the doors. Growth isn’t always the answer.
Trying to grow before you have your ducks in a row is possible, but it’s unlikely you’ll find a sympathetic lender willing to throw the dice on your venture—even if they believe in what you are trying to accomplish.