Lending Library

A personal credit score determines the level of risk that comes with lending to you. You use it to apply for credit cards and other financing options to cover major purchases. A business credit score works similarly, except instead of evaluating your risk as an individual, financial institutions evaluate your business’s viability.

Like personal credit, business credit takes time to build. While your equity may be able to boost your business credit, the overall goal is to keep your personal and professional finances separate. This guide will review the factors that go into your business credit score range and what a healthy number looks like.

What is a business credit score?

A business credit score is a numeric expression that represents the creditworthiness of a company. It is used by lenders, suppliers, and other financial institutions to evaluate the likelihood that a business will repay its debts. This score typically ranges from 0 to 100 for most scoring models, with higher numbers indicating better creditworthiness.

Unlike personal credit scores, business credit scores take into account factors such as the company's payment history, credit utilization rate, length of credit history, public records including bankruptcies, and the company’s size and industry. A healthy business credit score is crucial for securing financing, favorable loan terms, and establishing trust with suppliers and vendors.

Business credit score benefits.

Having a high business credit score can unlock numerous advantages for your business that go beyond simply qualifying for loans or credit lines. These include:

• Better financing terms: A strong business credit score can help you secure lower interest rates and more favorable repayment terms on loans and lines of credit.
• Increased borrowing power: With a higher business credit score, you may be able to access larger amounts of capital for major purchases or expansions.
• Improved supplier relationships: Many suppliers and vendors use business credit scores to determine whether or not they want to extend credit to a company. A strong business credit score can help establish trust and open up more opportunities for trade credit.
• Separation of personal and professional finances: By building a solid business credit score, you can keep your personal assets separate from your business assets, protecting yourself in the event of any financial issues.
• Insurance policy rates could be lower: A good business credit score may influence your insurance premiums, potentially leading to lower rates on your business insurance policies.

Overall, investing time and effort into building and maintaining a solid business credit score positions your company for better financial health and long-term success.

How a business credit score works.

A business credit score, much like a personal credit score, is a reflection of a company's financial responsibility and creditworthiness, but with a focus on the business's operations. When a business applies for loans or credit lines, lenders and suppliers will examine this score to decide how risky it is to offer credit. 

This score is calculated based on several factors, including the timeliness of bill payments, the amount of available credit used by the business, the length of the business's credit history, any legal filings such as liens or bankruptcies, and the company's financial stability. Essentially, this score is a numeric summary of a business’s financial history and current financial position, aimed at predicting the likelihood of the business fulfilling its financial obligations.

What goes into your business credit score?

Multiple factors contribute to your business credit score—some are in your control while others aren’t. A few of these factors include:

• Your payment history: If you have paid off your loans steadily over time without missing any payments, you will have built a strong business credit score.
• Credit history and age: How long has your business had financial liabilities? A new business will have a much lower credit score than a company that has maintained good credit for the better part of a decade. 
• Number of accounts: How many accounts do you have? How many are active with existing debits or credits? 
• Credit utilization: What percentage of allowed credit do you have? Have you reached the maximum limits of your business credit cards, or do they still have available credit for you to use? 
• Types of credit: Credit bureaus look for multiple funding sources, otherwise called a credit mix. 
• Recent credit inquiries: Have lenders recently requested information about your business? How many and how long ago?  

Many of these factors are also used for personal credit scores. However, they take on a new meaning when applied to a business. 

For example, the severity of the debt you take on also depends on the size of your business and your expected profits. Your credit can also be impacted by vendors that send unpaid invoices to collections or report overdue bills that you miss. 

Essentially, almost any financial transaction you make as a business owner can contribute to your credit score, which is why it is so important to maintain good, organized bookkeeping.

What is a good business credit score?

The main difference between a personal and business credit score is the number range. While a personal credit score ranges from 300–850, business credit scores are typically developed on a scale of 0–100. Additionally, there are 3 main business credit score bureaus, all of which use this range. These are Dun & Bradstreet (D&B), Equifax, and Experian.    

As a rule of thumb, the higher the score, the better. If you have a business credit score above 75, then you have exceptional business credit and shouldn’t have trouble securing funding. 

A score of 50–75 is considered fair and you should be able to get funding, though maybe at a higher interest rate or more limited terms. Finally, anything below 50 is considered poor credit and a high-risk account.Each of the three major credit bureaus collects and measures different information to calculate your business credit score.

How to improve your business credit score.

Improving your business credit score is a strategic process that requires consistent effort over time. Here are practical steps you can take to enhance your company's financial standing:

• Pay your bills on time or early: Establish a track record of timely payments, as payment history heavily influences your credit score.
• Reduce credit utilization: Aim to use a smaller portion of your available credit to show lenders you're not overly reliant on credit.
• Update your business information: Ensure your business information is accurate and up to date with all credit bureaus. Inaccuracies can negatively affect your score.
• Monitor your business credit report: Regularly review your credit reports from the major credit bureaus to catch and dispute any inaccuracies or fraudulent activities early.
• Establish trade lines with suppliers and vendors: Use trade credit to your advantage by establishing and maintaining positive payment histories with multiple suppliers and vendors.
• Limit credit inquiries: Only apply for new credit when necessary, as too many inquiries in a short time can indicate risk to lenders and negatively impact your score.
• Build a diverse credit mix: Having a mix of credit types, such as a business credit card, a line of credit, and trade credit, can positively affect your score.

By taking these steps, you can improve your business credit score, which can lead to better loan terms, increased funding opportunities, and a stronger financial foundation for your business.

Check your business credit score.

You can find sample business credit score reports for each of these credit bureaus so you can determine which ones you want to use. The scores should stay relatively equal across each report. 

To access your credit scores, visit the websites of these credit bureaus. You can pay from $40 at Experian up to $100 at Equifax for your report.

Understanding your business credit score range can help you secure funding for startup expenses and company expansion. You can be more aggressive in negotiations with lenders when you have a good score and can take steps to improve it before taking out a loan if you have a poor one. Don’t be afraid of your credit score—use it to make sound financial decisions for your business!

Do you ever ask yourself why we celebrate some milestones with a party while we ignore others? It is de rigueur to celebrate a wedding or a pregnancy with a bridal shower or baby shower, but historically the same love hasn’t been given to accomplishments like earning a Ph.D. or starting a new small business.

Enter: Twitter. Yes, the internet-destination for doom scrolling can also be a bastion of great ideas. While the idea has circulated on the ether of the internet for a minute, talk of business showers appears to have recently picked up steam on the platform. User @EarnYourLeisure tweeted their idea for celebrating new businesses, similar to celebrating the anticipated arrival of a new baby.

Another user agreed and shared her plans to throw her business a shower.

How to throw a business shower.

Business showers are a novel idea, so there isn’t prescribed etiquette to determine how and when to throw a business shower. But since we’ve been to more baby/bridal showers than we’d care to remember, we’re confident we can use that blueprint to create a better, badder shower to celebrate a friend or family member’s newly-minted boss status. 

We know that showers usually involve people, gifts, shows of support, and silly games. Recipients usually register for the gifts because in this case, it’s the utility, not the thought that counts. So how can we make that work for a business shower?

1. Make your guest list: it’s time to invite everyone who wants to shower your business with love and support. Yes, while we believe that should be everyone you know, we recommend limiting invites to your most ardent cheerleaders. That aunt who only cares about whether or not you’re getting married soon is not going to bring the energy you deserve. And neither you nor your business needs that right now. 
2. Send invites: Don’t forget to make Emily Post proud by sending a lovely invitation. You can do a digital invite through Paperless Post or Evite or opt for a paper version. Ask people to RSVP because a.) it’s polite and b.) you’re practicing those Call-to-Action skills that will be very important when running a business. 
3. Choose the venue: If your business has a physical location, that’s the obvious choice. Allowing your friends and family to see your business space is the entrepreneurial equivalent of “feeling the baby kick.” You can also hold the shower at a restaurant or rope one of your friends/family members into hosting it for you. And because we’re in a pandemic, there’s also the option of throwing yourself a virtual shower. 
4. Register: Think of the supplies and tools that you need to lay a strong foundation for your business. Yes, a stapler may be on the list, but you can also ask for gifts like a few months of paid bookkeeping software, a small working capital fund, or shipping supplies. 
5. Enjoy the shower: You’ve worked hard for this. Let yourself relish in the support.
6. Send thank-you notes: We would be remiss in invoking the ghost of Emily Post if we did not also remind you to send a thank-you note for all the gifts you receive. 

What to buy for a business shower.

Okay, so what kind of gifts does one buy (or register) for a business shower? Shower gifts should be useful, thoughtful, and cute (if at all possible—sometimes it is not.). As with other showers, it’s best to get a gift receipt so the recipient can return or exchange the item if they need to. 

• Office supplies: staplers, pens, papers, notebooks, envelopes, etc.
• Computer equipment: laptop, mouse, keyboard, printers, scanners, phone chargers (you can never have too many), etc.
• A mobile payments reader
• Bookkeeping services
• Working capital funds
• Payroll software (if the business will have employees)
• Your expertise: If you have professional expertise that could benefit a new business (like marketing, accounting, business development, etc.), you can consider gifting a few hours of your time to share your insight or your labor. 

Business shower activities.

No, we’re not going to suggest you smell diapers filled with melted candy bars. This is professional. Celebrate a new business venture by embracing the excitement of friends and family to do something to support the business. 

• Social media bonanza: Ask guests to post something on social media. 
• Try and review: Have a product or experience you’d love your friends and family to test? Take them through the experience. It’s great practice for the business owner. Plus, at the end of the experience, guests can tell you what they thought by leaving a review online. 
• Focus group: If you’ve got the whole gang together, why not use it as an opportunity for an impromptu focus group?
• Spread the word: Guests can split up to flyer neighboring areas. 
• Brainstorm: Brainstorm hashtags, marketing approaches, new products, you name it. This is the time to take everyone’s advice and put it in one place. You can ask one person to be in charge of taking notes, the way you’d usually have someone recording the gifts. There are bound to be some great ideas and creative solutions. Even if it doesn’t apply now, these suggestions may help you down the road. 

Don’ts for a business shower.

While it may be tempting to go hog wild, please stop borrowing from baby-party traditions, and please leave “gender reveal parties” alone. Yes, an “industry reveal” party for a friend’s new business does sound very fun, but gender reveal pyrotechnics have already started enough fires. We don’t need more. 

What do you think? Will you be embracing business showers? Are there any business shower gifts that we missed? Let us know in the comments.

Asset-based lending, also known as asset-based financing, is a type of business loan or line of credit that companies secure with collateral. With traditional loans, lenders often emphasize a company’s creditworthiness and cash flow when determining whether to approve applications for business funding. Yet with asset-based lending, the value of the collateral that backs the financing plays a more meaningful role in your business’s ability to get funded and its borrowing capacity. 

How does asset-based lending work?

In asset-based lending, a business secures a loan or line of credit by offering its assets as collateral. These assets can include real estate, inventory, accounts receivable, equipment, and other property that holds value. The lending agreement specifies how much money the business can borrow, which is usually a percentage of the collateral's appraised value. This percentage varies depending on the type of asset and its marketability; for instance, receivables might be financed at around 70% to 80% of their value, while inventory may only secure around 50%.

The process begins with the lender evaluating the assets to determine their current market value. If the business defaults on the loan, the lender has the right to seize the collateral, sell it, and recover the owed amount. This makes asset-based loans less risky for the lender compared to unsecured financing, potentially leading to more favorable interest rates for the borrower. However, businesses must consider the risk of losing their assets before entering into such agreements.

How much can you borrow? 

Depending on the lender you work with and other factors, your business might be able to borrow up to 80% of the face value of its accounts receivable. When taking out an equipment loan to purchase equipment, eligible borrowers may be able to secure up to 100% financing. However, if your goal is to use equipment your business already owns as collateral for an asset-based loan, some lenders may be willing to extend only up to 50% of the equipment’s value (depending on the type of equipment, its condition, projected depreciation, and other details).

Pros and cons of asset-based financing.

If you’re considering applying for an asset-based loan to secure additional capital for your business, it’s important to evaluate the pros and cons associated with this type of financing. 

Pros of asset-based financing.

• Qualification requirements: Perhaps the biggest appeal of asset-based financing is the fact that these loans and lines of credit tend to be easier to obtain, compared with traditional business funding options. Cash flow challenges, limited time in business, and even poor personal and business credit scores may not be deal-breakers with this type of financing, depending on the lender. 
• Fast funding: Certain types of asset-based lending may feature faster funding speeds compared with traditional business loans (especially SBA loans). Accounts receivable loans, for example, could provide eligible borrowers with access to capital in as little as 24 hours.
• Less personal risk: With traditional business loans, the business owner often has to sign a personal guarantee to secure funding. Asset-based financing, however, may not feature this requirement (though it’s important to verify the details before signing any financing agreement). 

Cons of asset-based financing.

• Higher costs: It’s common for asset-based financing to feature higher interest rates and fees compared with traditional business loans or lines of credit. In some cases, the cost difference could be significant. 
• Some assets may not qualify: Your asset will need to satisfy a lender’s criteria to qualify as collateral for an asset-based loan or line of credit. In general, acceptable assets are high value, have a low depreciation rate, and are easily converted to cash.
• Loss of asset(s): If your business defaults on its debt, you risk losing the asset(s) it pledged as collateral.

Asset-based lending vs. cash-flow lending.

When comparing asset-based lending to cash-flow lending, it's essential to understand the primary differences between these financing options. Asset-based lending focuses on the value of the collateral that a business can provide, such as inventory, equipment, or accounts receivable. This type of financing is particularly beneficial for companies that have significant physical assets but might not have a strong cash flow.

On the other hand, cash flow lending evaluates a business's future cash flows as the main criteria for the loan. Lenders look at the company’s past and projected cash flow statements to assess its ability to repay the loan. This type of lending is more suitable for businesses with strong and predictable cash flows but fewer physical assets to use as collateral.

The choice between asset-based lending and cash-flow lending depends on the specific needs and circumstances of the business. If a company has valuable assets but faces cash flow challenges, asset-based lending may offer a viable solution. Conversely, for businesses with strong cash flows but limited assets, cash-flow lending might provide a more appropriate form of financing. Both options have their merits and potential drawbacks, necessitating a careful analysis to determine the best fit for the business’s financial strategy.

Is asset-based lending right for my business?

Asset-based financing can come in many different shapes and sizes. Therefore, the best way to determine whether a financing solution makes sense for your business is to research and ask questions before you apply for any new loan, line of credit, or cash advance. 

First, you should make sure your business can afford to borrow additional money. If you’re confident you can manage the new indebtedness and the repayment schedule that involves, you should then assess the risks, benefits, and costs. Finally, take the time to shop around and compare business financing options. Interested in asset-based lending and how your business might benefit from this type of financing solution? Learn more about accounts receivable financing here.

Running a small business often means navigating a financial landscape where debt is vital to growth and sustainability. However, managing business debt can be a double-edged sword. On one hand, it offers liquidity and can fuel expansion; on the other, it can be a significant financial burden if not managed properly.

Understanding when to use business debt.

Debt is not inherently bad. When managed properly, it can help your business take advantage of opportunities and grow. But recognizing the right time and the right reasons for taking on debt is crucial:

Consider debt for investments that will grow your business.

Debt is often used for investments in areas like real estate, inventory, equipment, or acquiring another business that will increase profitability and contribute to long-term success.

Construction

In the construction industry, a loan can facilitate the purchase of state-of-the-art machinery or equipment that increases operational efficiency and allows you to take on larger projects.

Retail

For retail businesses, a loan can be pivotal in expanding inventory, especially before peak shopping seasons. Additionally, it can help acquire bulk inventory at a discounted rate, reducing overall project costs and increasing profit margins.

Healthcare

Healthcare providers can use loans to invest in new medical equipment, expanding their services.

Transportation

In the transportation sector, loans can enable the purchase of additional vehicles, such as trucks or vans, expanding service capacity. Investing in newer, more efficient vehicles can reduce maintenance and fuel costs, leading to higher profitability.

Restaurants

Restaurants can benefit from loans by renovating their space to increase seating capacity or create a more appealing ambiance. Additionally, funds can be used to upgrade kitchen equipment, enhance the efficiency of food preparation, and expand the menu to attract more customers.

Unexpected events and short-term cash flow problems.

Sometimes debt can be a solution to bridge a gap between a large, upcoming expense and liquid funds, as long as you have a plan to pay it back promptly.

For example, a construction or transportation company could use a business loan to cover ongoing expenses while waiting on final payment from customers.

Other factors to consider before taking on debt.

Before you approach a lender, there are several factors to evaluate to ensure that debt is the right decision for your business:

Your business metrics.

Evaluate your business's debt service coverage ratio (DSCR) to determine if you have enough cash flow to cover new debt payments comfortably.

Market conditions.

Consider the current economic climate and market conditions that could impact your business's ability to repay debt, such as interest rate fluctuations or industry-specific risks.

Your business's financial health.

Assess whether you have exhausted all other financing options and whether taking on debt aligns with your overall financial plan and business objectives.

The purpose of the loan.

Be clear on how the loan will be used and how it contributes to the long-term strategy of your business.

Time to increase revenue.

Once you've decided to take on debt to invest in your business, understanding the timeframe in which you can expect an increase in revenue is crucial.  For instance, upgrading equipment may yield quicker productivity gains and revenue increases in manufacturing sectors, while investments in marketing or expansion might take longer to show tangible results.

Debt management strategies

Identifying your financial position and setting the right strategies is essential for effectively managing your business debt.

Create a debt schedule.

Creating a debt schedule might sound daunting, but it's a straightforward process that can bring significant clarity to your financial management. Start by gathering all the relevant information about each debt your business owes. This includes lender names, the original amount borrowed, the current balance, interest rates, monthly payment amounts, and the maturity date for each loan.

Steps to Create a Debt Schedule:

1. List Each Debt: Begin with a spreadsheet or a table. List out each debt individually. This could include bank loans, credit cards, lines of credit, and any other form of debt.
2. Detail Loan Information: For each debt, record the total initial amount borrowed, the current balance owed, the interest rate, and the terms of repayment (such as the loan term or payoff timeline).
3. Monthly Payments: Note down the monthly payment required for each debt. This helps you understand how much of your monthly cash flow is allocated to debt repayment.
4. Update Regularly: Your debt schedule is not a static document. Update it regularly as you make payments or take on new debts. This will help you keep a clear picture of your financial commitments.

Manage your cash flow meticulously.

Effective cash flow management ensures you can meet your debt obligations and prevent undue financial stress. Start with detailed cash flow forecasts and consider seasonal trends in your business.

Increase your business revenue.

Boosting income through sales, diversifying your offerings, or exploring new markets can provide additional funds for debt repayment.

Cut unnecessary expenses.

Reducing costs by renegotiating vendor contracts, eliminating non-essential services, or finding more efficient operational processes can free up money to pay down your debt.

Negotiate with creditors.

If you’re struggling with high debts or interest rates, it's worth reaching out to your creditors to negotiate more favorable terms.

Use windfalls wisely.

Any unexpected funds, such as tax refunds or a robust sales season, can be used to accelerate your debt repayment.

Consider selling off assets.

If you have assets not vital to your business’s operations, consider selling them to generate funds for debt reduction.

Use the snowball or avalanche method for debt payoff.

If you are managing debt from multiple sources such as credit cards and struggling to pay it off, consider adopting a focused method for paying your debt off. The snowball method involves paying off the smallest debts first, gaining motivation as you extinguish individual debts. The avalanche method focuses on paying the debt with the highest interest rate first, saving you money in the long run.

Be cautious with loan stacking.

Loan stacking is when a business takes on multiple loans from different lenders in a short period. This can lead to confusion and overcommitment. Instead, be strategic about the timing and number of loans you take out.

Consider debt consolidation and refinancing.

Debt consolidation involves combining multiple debts into a single loan with a longer repayment period, potentially lowering your monthly payments. Refinancing involves taking out a new loan to pay off your existing business debt, usually to secure a lower interest rate or better terms.

Monitor debt and revise strategies.

Managing business debt is not a one-time action. It requires ongoing attention, especially as your business grows and changes.

Regularly review and update your debt schedule.

New loans or changes in interest rates can affect your overall repayment plan. Updating your debt schedule ensures you're always clear on your financial commitments.

Stay connected with your accountant or financial advisor.

Professional advice can be invaluable in navigating complex financial matters, including debt management and restructuring.

Be proactive in addressing potential issues.

If you anticipate having trouble making debt payments, communicate with your lenders early to explore possible solutions and avoid penalties or damage to your credit.

Debt can be a powerful tool for small businesses, but it must be wielded with care and sound judgment. By following the strategies outlined in this guide, you'll be better equipped to manage and eventually overcome your business debt, positioning your company for long-term success.

Remember, effective debt management is not just about repaying what you owe—it's about using your financial resources wisely to grow a thriving, sustainable business.

Given the potential impact financing can have on your business, you need to find the best place to get a small business loan. Lendio reviewed the largest SBA lenders and national banks to find the ones with the best small business loan options. Let’s look at some of the prime bank options available to you.

US Bank: Best for smaller loan amounts.

US Bank offers a specialized business “quick loan”, which is a term loan from $5K to $250K with terms of up to 7 years and no origination fee. The loan is “quick” because it can be applied for online. Both unsecured and secured options are available. 

Products offered:

• “Quick” term loan from 5K-250K with terms up to 7 years
• Line of credit up to $250K
• Commercial real estate loans with terms of up to 15 years
• SBA loans

Online application: Yes

Huntington National Bank: Best for underserved communities.

Huntington National Bank is the number one distributor of SBA loans in the U.S. It also runs a program called “Lift Local Business” that supports minority, woman, and veteran-owned small businesses through loans with reduced fees and lower credit requirements.

Products offered:

• SBA loans
• Term loans
• Lines of credit

Online application: Yes- for current customers.

JPMorgan Chase: Best for no origination fees.

Chase offers term loans, lines of credit, commercial real estate, and SBA loans. The bank charges no origination fees on its term loan and has no prepayment penalty on loans less than $250K. 

Products offered:

• Line of credit up to $500K 
• Term loan up to $500K with terms of 1-5 years
• Commercial real estate loans from $50,000 with terms of up to 25 years
• SBA loans

Online application: No

TD Bank: Best online application options.

TD Bank is the 2nd-largest SBA loan distributor in the U.S. and offers an online application for any of its loan products for amounts less than $250,000.

Products offered:

• Line of credit from $25K-$500K
• Term loan from $10K-$1M with terms of 1-5 years
• SBA loans
• Commercial real estate loans of up to $1M with 5-year terms

Online application: Yes

Wells Fargo: Best for unsecured lines of credit.

While Wells Fargo offers fewer loan products to small businesses than other banks, it offers multiple unsecured line of credit options with no fee. For businesses with less than two years of business, they can apply for an unsecured line of credit of up to $50K. For those with two years in business or more, Wells Fargo offers a line of credit of up to $150K.

Products offered:

• Line of credit
• SBA loans

Online application: Yes

PNC Bank: Best for unsecured loan options.

PNC Bank offers multiple unsecured loan products including an unsecured line of credit and an unsecured term loan. The unsecured line of credit and unsecured term loan are both available for amounts from $20-$100K.

Products offered:

• Unsecured line of credit from $20K-$100K
• Secured line of credit from $100K
• Unsecured term loan from $20K-$100K with 2-5 year terms
• Secured term loan from $100 K with 2-7 year terms

Online application: Yes - for existing customers for limited loan products.

BayFirst National Bank: Best for fast SBA loans.

BayFirst, the third-largest SBA lender in the U.S. offers a specialized SBA 7(a) loan called “BOLT”. The loan is available for up to $150,000 with a 10-year term. The streamlined online application process can you get funded as quickly as six days.

Products offered:

• SBA loans

Online application: Yes

Bank of America: Best for building credit.

Bank of America offers a secured business line of credit to business owners with six months in business and $50K annual revenue. The credit line’s purpose is to help the business owner build business credit, so the lines start as low as $1000 and are secured by a refundable cash deposit equal to the line amount. Once the business has established its credit history and reached a revenue of $100K/year, the business can graduate to a larger unsecured line of credit.

Products offered:

• Secured line of credit from $1K
• Unsecured line of credit from $10K
• Unsecured term loan from $10K with 1-5 year terms
• Commercial real estate loans from $25K with terms of up to 15 years
• SBA loans

Online application: Yes

Eligibility criteria for bank business loans.

While some banks will have specialized products with more flexible requirements, the most common eligibility criteria for a bank business loan are:

• 700 credit score
• 2 years in business
• $100,000 annual revenue

Other lender options.

Community banks

Community banks have a smaller footprint than banks listed above, but your local community bank may have more flexible options and a more personalized customer experience.

Online lenders

Online lenders don’t offer bank accounts. Instead, they focus solely on lending. These lenders offer several alternative financing options like business cash advances and invoice factoring that can be easier to qualify for in addition to term loans and lines of credit.

Microlenders

Nonprofit lenders offer loans of less than $50,000 called microloans. Microlenders often have less strict eligibility requirements and frequently cater to specific locations or underserved groups.

Learn more about how to get a business loan.

Methodology

Lendio based its selection on the following criteria:

• The largest number of SBA loans originated according to SBA data.
• Largest national banks by assets held according to federal reserve data.
• Loan products the bank offers according to the bank’s website.
• Special features such as an online application, unsecured loan, or faster processing times as identified by the bank’s website.

A significant 23% of small businesses surveyed use artificial intelligence (AI) with 39% stating they plan to adopt AI. 

Small businesses are finding innovative ways to harness AI's abilities, from streamlining marketing efforts and enhancing customer communication to optimizing inventory management. Read on to learn more about how AI can benefit your small business.

Unpacking AI for the uninitiated.

Understanding AI and its potential may seem daunting, but clarifying its key concepts and applications can open up a world of opportunity for small businesses.

Machine Learning (ML)

ML empowers systems to learn from data, improving accuracy without explicit programming.

Natural Language Processing (NLP)

NLP allows systems to understand and respond to human language, enhancing customer service with sincerity and insight.

Robotic Process Automation (RPA)

RPA automates mundane tasks with precision, improving efficiency across sectors.

Predictive Analytics

This technology uses data and algorithms to predict future outcomes, aiding in inventory management, market trends, and client behavior analysis.

Generative AI

Generative AI revolutionizes artificial intelligence by enabling the creation of new, personalized content through machine learning.

How small businesses use AI.

Of the small businesses using AI the most common use cases include marketing activities at 56%, customer communications at 42%, inventory management at 33%, and fraud prevention at 26%.

Automation

Almost any repetitive task could be a candidate for using AI technology.

You’ve probably already used a chatbot for customer service — perhaps to receive technical support for a cable outage or make an online payment for property taxes. That chatbot and AI-powered knowledge base eliminated or reduced human time during your interaction.

One estimate says that the “average customer service call lasts six minutes. Four and a half of those minutes, or 75% percent of that time, is spent by agents manually looking for the right information.” Letting AI take its first shot at finding and presenting the information frees up customer service representatives to handle complex problems.

Email marketing software also uses AI. Remember those workflows you configured in your mail software to send customers a welcome email or invite them to use a discount code on their birthday? You can thank AI for that.

AI enables software to write email subject lines that generate better open rates or create a hyper-personalized newsletter. No more agonizing over an email subject line? Who wouldn’t cheer for that?

CRM

AI also integrates well with the customer relationship marketing (CRM) process.

For example, the wine industry realized that younger generations tend to use the Internet for wine purchases. Online merchants reaped the benefits of using AI-powered tools to help guide inexperienced customers to wines that matched their taste requirements.

AI can segment your customer list and create personalized call-to-actions based on where your customers are in their customer journey. Repeat customers may act upon a CTA that recognizes and rewards their past orders (e.g., “You enjoyed our apple pie last month. We have fresh ones available today!”). New customers may respond better if the CTA includes social proof (e.g., “Don’t you want to join 25,000 other savvy wine drinkers by signing up for our monthly newsletter?”).

Fraud Detection

AI can help detect abnormal patterns to generate alerts. Credit card companies have been using this function for a while—notifying you or even freezing your card when a suspicious transaction occurs. Your bookkeeping software might flag an entry as suspicious (it knows your car can’t hold $1000 worth of gasoline).

Microsoft suggests the benefits of detecting unusual behavior can actually go beyond stopping malicious or inaccurate transactions and potentially opening up new customer markets for your business. Their example is a plumbing-supply company that receives a large order from a non-traditional customer. A follow-up call reveals a new use case for plumbing supplies (artists need supplies, too!), and voila—a new customer market appears.

Another example is the insurance industry using AI and predictive analytics to help underwriters make risk calculations for complex customers. Would you want to guess the risk for a customer who recently completed a safe driving course but owns a Dodge charger and has a history of speeding tickets?

Manufacturing

Manufacturing businesses can use AI to help reduce the cost and time spent on quality checks (e.g., AI and robotics can check part tolerances quicker and more accurately than humans). AI can also predict equipment failure and maintenance needs reducing the “line down” syndrome that means lost revenue.

Inventory Management through AI

One compelling use case of AI in inventory management is its capability to predict demand and manage stock levels efficiently. For a small retail business, balancing inventory levels can be a tightrope walk between having too much (resulting in wastage or increased storage costs) and too little (leading to stockouts and lost sales). 

AI systems, using predictive analytics, can analyze historical sales data, seasonal trends, and even current market dynamics to forecast demand for products with remarkable accuracy. This foresight enables businesses to adjust their inventory procurement accordingly, ensuring they have just the right amount of stock on hand

Challenges of AI

Like any technology, AI growth has some hurdles ahead.

Bias in AI is a concern as engineers may program their own biases into the technology, or skewed or limited data may produce unreliable results. These biases could mean AI suggestions (e.g., who gets what medical treatment or the financing terms for a client) aren’t objective.

The “black box” problem—data goes through non-transparent algorithms to produce a result—suggests that end-users will still rely on their gut to validate AI suggestions. In simple terms, how many times has autocorrect presented the wrong word, and you had to override it?

The algorithms that underpin generative AI can sometimes make unpredictable associations or draw from less relevant data points, leading to results that may not align with expectations or reality.

The roadmap to AI integration.

Technology is a double-edged sword; its benefits are matched only by the responsibility to use it wisely.

Knowing where to start can often be as straightforward as comprehending your business's most pressing challenges and seeking out AI solutions equipped to address them. 

The 3 Cs – character, collateral, capacity – summarize the elements that a financier uses to underwrite a loan. This technique of assessing the client comprises both qualitative and quantitative measures.

Character

Character refers to the borrower’s reputation. The shareholders who are going to guarantee the loan and the management of the business will all come under scrutiny to determine if they are reliable and will repay the funds.

The lender will usually look at the credit history of the business owner to gauge honesty and reliability. Considerations may include:

• Whether or not they pay bills on time.
• Whether or not they’ve used credit before.
• How long they’ve been in business, and what positions they held before starting the business.
• How long they’ve lived at their respective addresses.

Lenders will also look at the credit scores of the owners of the business. This score is numeric, typically between 300 and 850, gleaned from the info in your credit report. High scorers generally have a lower risk. Each lender has its own standards, but many of them use credit scores to assist them in making their evaluations. It all depends on the level of risk they find suitable for a particular credit product.

Credit scores are weighted as follows: 35 percent payment history, 30 percent amount owed, 15 percent length of credit history, 10 percent new credit, and 10 percent types of credit in use. 

Collateral

Collateral is any asset used to secure the loan. Savings, real estate, inventory, accounts receivable, and equipment are all assets that could be used as collateral.

The lender asks for collateral because, in the event of insolvency, it can be sold or collected to generate funds to pay the loan. Since in the experience of most lenders asset classes such as prepaid amounts, goodwill, and investments will not raise any significant amounts, they are generally not considered for collateral.

If you’re using a property as collateral, its location and quality, and its adaptability are some of the features your future lender will look at.

Capacity

Most commercial credit officers refer to capacity as cash flow, and it represents the ability of the company to repay debt. Since a big down payment will reduce the risk of default, the lender will consider any capital the borrower puts into a potential investment. In short, the lender is looking at how much debt the borrower can comfortably handle. The following are usually requested from the borrower for the lender to evaluate cash flow/debt service:

• Business tax returns
• Historical financials, such as the balance sheet and profit & loss statements, interim financials, and/or projections
• Personal financial statements for each guarantor
• Rent rolls for leased property

If you’re considering a business loan, understanding the 3 C’s will give you a high-level understanding of what a potential lender will look for. Visit this post for more in-depth information on business loan requirements.

Even if you don’t know what ACH stands for, you’ve probably taken advantage of ACH transfers. If you’ve received your paycheck as direct deposit, sent a few bucks to a friend through Venmo, or paid your power bill online, you’ve used ACH.

ACH payments, which launched in 1974, have become such a common part of modern life that most people don’t even think about the mechanism that moves money in and out of their bank accounts.

For small businesses, understanding the basics of ACH is important on two fronts: you can make and receive payments through ACH, and ACH is a common method funders use to collect repayment of a business cash advance.

What are Automated Clearing House (ACH) transactions?

ACH is an acronym for “Automated Clearing House.” Essentially, it is the method banks use to send money between accounts electronically.

ACH is maintained, developed, and administered by the National Automated Clearing House Association (NACHA), a nonprofit funded by the financial companies that use ACH.

Used by millions of companies, the federal government, and all banks, the amount of money that moves through NACHA’s network is staggering. In 2019, some 24.7 billion payments were processed through the ACH network, a figure that has grown by more than 1 billion payments every year since 2014.

Not only are bill payments, salaries, and charitable gifts sent through ACH—Social Security, tax refunds, and other government benefits are deposited through ACH as well. Because of this, the federal government regulates the ACH network along with NACHA. NACHA estimated that the total value of all payments processed through ACH in 2019 was more than $55.8 trillion.

How do ACH payments work?  

While the result of an ACH transaction is similar to writing a check, the process is different.

ACH transactions are instructions to move money electronically from one bank account to another. These transactions can either be initiated by the person sending the money (credit) or the person receiving the money (debit). They are processed in batches and the transfer of funds takes place between banks.

Before banks are contacted, authorization must be provided by the people involved. To receive a direct deposit as an employee, for example, you must sign an agreement with your employer. To pay a bill through ACH, you must authorize the transaction first. Oftentimes, you agree to the transaction once, and then the direct deposits or automatic payments continue until you want them to stop.

In all ACH transactions, instructions are sent from an originating depository financial institution (ODFI) to a receiving depository financial institution (RDFI), which are usually both banks—sometimes even the same bank. The instructions from the ODFI can be to either request or deliver money.

How does ACH work for employee direct deposits?

If an employee agrees to be paid through direct deposit, the employer’s bank is the ODFI in this instance. The employer shows the ODFI that the employee approved the transaction. The ODFI verifies this information and submits it to the ACH network. The ACH network routes the transaction to the RDFI of the employee. The RDFI makes the money available by crediting it to the employee’s bank account; at the same time, the ODFI is debiting money out of the employer’s bank account. Finally, the ACH network settles the transaction with both banks.  

The process sounds complicated, but because it is automated and electronic, it usually only takes 1 to 2 business days.

How to pay employees using ACH.

To set up direct deposit for your employees, you should talk to your bank (i.e., the ODFI in this case) about what information they need and how much it will cost you.

Interested employees will agree to direct deposit and provide you with a bank account and routing numbers. You then provide this information to the ODFI.

When payday comes, you submit your payment files to the ODFI. The ODFI then submits the transaction to the ACH network, which results in your employees receiving funds in their accounts soon after.

Depending on your agreement with your bank, you will be charged a flat fee or a percentage based on the amount moved through the ACH network.

How does ACH work for accepting payments?

The system is the reverse when a person is paying a company like a consumer buying a product through Square or paying an insurance bill online. The ODFI would be the insurance company’s bank. The money would flow from the RDFI to the ODFI.

How to accept ACH payments.

To accept electronic payments for your goods or services, talk to your bank. Banks, credit card processors, and merchant account providers all offer various ACH services that vary in cost.

Especially if your operation is very small, new, or both, a popular way to accept ACH payments is Square, Venmo, or other mobile payment processors. Many businesses opt for these new payment processors because the fees are easy to understand, and it allows them to provide for customers who want to pay with plastic.

How funders use ACH payments.

Many funders who offer a business cash advance will utilize ACH to receive repayment on the advance. This is why you may occasionally hear this type of funding referred to as an “ACH loan.” 

A business cash advance provides access to money upfront based on expected future revenue. The funder will then set up an automatic withdrawal via ACH of a preset amount on a daily or weekly basis.

Difference between ACH payments and wire transfers.

Wire transfers are another common way to send money between bank accounts, but these transactions are different from ACH payments in several ways. ACH payments only work within the United States, while wire transfers can be sent around the world. Wire transfers are immediate, which can be beneficial but has also made this method of payment popular with fraudsters. The cost of wiring money is typically quite high, too, compared with the relatively slight cost of ACH transfers.

You may also hear about Electronic Fund Transfers (EFTs), a blanket term that encompasses ACH payments, wire transfers, and pretty much any time money is exchanged electronically. All transactions that require a PIN code are EFT, too, including using an ATM or paying with a debit card at a grocery store.

Why use ACH?

The benefits of ACH are pretty clear: it’s fast, accurate, and relatively cheap. Because it is utilized by the US government and all the major banks, ACH is highly regulated and secure. 

The fees range depending on your bank and how much money you process through ACH, but they are generally less expensive than what credit card processors charge. The low fees and overall convenience are major reasons why many businesses turn to ACH.

Additionally, ACH will make a huge dent in the amount of paper your business has to handle. Maintaining a check registry has long been a headache for most small business owners, while the automation and simplicity of ACH make payments much more streamlined. And no one has ever lost an ACH payment in the mail.

The drawbacks of ACH

By automating your payroll with ACH or enrolling in repeating payments, you may feel like you have less control of your cash outflows.

As a practice, you should always pay close attention to your bank accounts, even if you use ACH often. Automated payments can overdraw your account. You might also continue paying for services that you stop using if the payments are automatic and you stop paying attention.

Keep in mind that ACH payments can only happen between 2 bank accounts based in the U.S.

You must also consider the costs involved with ACH, even though they are typically lower than most other electronic payment options.

How much will it cost?

The cost of using ACH transfers will depend on the financial institution, how much money you are transferring, and how regularly you transfer money. Banks may also charge rates that are different from mobile payment processors like Square, so you should do some research on what options are available to you.

Many ACH processors will charge a flat fee on every transaction, often between $0.25 and $0.75, although some processors charge as much as $1.50 per transaction. Other companies will charge a percentage on each transaction, usually between 0.5% and 1.5%.

ACH transfer fees are almost always lower than credit card processing fees, which can range from 1.5% to 4% on each transaction.

Is ACH secure?

Because it is regulated by federal law, ACH transfers are one of the most secure ways to move money between bank accounts. To prevent fraud, NACHA requires a significant amount of identifying information from every person, business, and bank involved in the ACH process.

With such safety, speed, and convenience, it makes sense that so many small businesses adopt ACH processing into their banking practices.