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For business owners and entrepreneurs with a large amount of savings, the main obstacle to starting a business is often coming up with a viable idea. Yet many aspiring entrepreneurs have a different problem—the idea is there, but the capital isn’t.

Startup funding or startup capital is something that every new business needs to get off the ground. As an entrepreneur, however, the challenge is figuring out where to find the startup funding you need to launch your new business. On a positive note, there are many startup funding options available if you know where to look.

How do startups receive funding?

Accessing startup financing can be a struggle. Traditional banks rarely offer business loans to brand-new entrepreneurs. Before lending any funds, many lenders prefer to see a proven financial track record that demonstrates an ability to repay the funds a business loan applicant is seeking. Without that financial history, the lender does not have the foresight to predict whether your venture may be successful enough to make good on your obligation.

These challenges create quite a conundrum for would-be entrepreneurs. How do you get the capital you need to get your startup off the ground when banks are unlikely to approve you for traditional business loans? 

The good news is that there are multiple ways small business owners can find the startup funding they need. Some entrepreneurs find alternative financing options to fund their startups, some turn to investors, and others rely on self-funding to get the job done. Additionally, there are a few out-of-the-box ways to access startup capital available. One of the key ways to succeed as a new business is to find the right combination of startup funding that works for you.

Startup funding stats.

  • 54% of SMB ownersstarted their business with personal funds with another 12% relying on friends and family. 
  • 79% of SMB owners needed less than $100,000 to start their business with 43% needing less than $10,000.
  • The average loan amount for a small business owner is $47,000.*
  • A small business has a median of five employees when it is first funded by an outside lender.*
  • A small business has been in business for about three years (a median of 40 months) when it is first funded by an outside lender.*

*Based on internal Lendio data of 300,000+ loans funded since 2013.

Types of startup funding.

Below are 11 types of business funding that are available to startups. Read on to discover whether one or several of the following startup funding options might be a good fit for your new business. 

1. Alternative business loans

Small business loans from alternative lenders can be a solid funding resource for new startups. These loans often feature more lenient qualification standards compared with traditional business loans. As a result, alternative business loans may be a better fit for new businesses that are unable to qualify for other types of business financing. 

In addition to less stringent requirements, alternative business loans also feature other benefits such as credit-building potential and faster funding speed. And these small business loans may offer more flexibility when it comes to how you use the money you borrow as well. 

2. SBA startup loan

The Small Business Administration (SBA) is typically known for providing loans to established businesses. However, that doesn’t mean there’s no hope for an entrepreneur who’s trying to get their new business venture off the ground. 

If you are able to meet the SBA’s borrowing requirements, you may be able to qualify for an SBA loan even as a startup. Generally, these loans are available to partially-financed startups. The SBA likes to see the business owner have some “skin in the game” with around 30% of the owner’s own money in the business. The SBA also prefers to work with startups where the owner has some experience in the industry and in management.

It’s also important to note that the SBA itself does not issue loans. Rather, the agency establishes the guidelines for an approved intermediary and guarantees a percentage of the loan (in the case of default) which minimizes the risk to the lending partners. This financing vehicle is available to small businesses when funding is otherwise unavailable on reasonable terms. To learn more about SBA loans for startups, or to see if your business qualifies, check out this helpful SBA loan guide.

3. Microlenders

Entrepreneurs who cannot secure startup funding from other sources may also want to consider working with microlenders. Microlenders are often non-profit organizations that offer loans to small business owners—sometimes including startups—for small amounts. The loan amounts from microlenders can vary, but frequently range from $5,000 to $50,000. 

Some microloans are available to specific categories of small business owners, such as women-owned businesses or minority-owned businesses. But other microloans may be obtainable by entrepreneurs that fit in broader categories. 

The Small Business Administration also offers a microloan through SBA funding intermediaries for up to $50,000. The SBA micro loan option does not require any collateral from the borrower and is available to eligible businesses, including startups. 

4. Business line of credit

Business lines of credit are among the most flexible ways to help fund your startup. These credit lines can provide a business owner with quick capital, which they can use to meet a variety of business needs or resolve a cash flow gap.

When you open a business line of credit, the lender gives you a credit limit which represents the maximum amount you can borrow on the account. You are not required to use any of the funds until you need them, and the lender only charges interest when you access your credit line. 

As you repay the money you borrowed, you also eliminate the interest the lender charges you. At the same time, you regain the ability to borrow against the same credit line again in the future—up to the credit limit—as long as the account remains open and in good standing (and the draw period is active on your account). 

5. Business credit card

A business credit card could be another helpful type of startup funding to consider when you open a new business. Even if your business is brand new, you might qualify for this type of account if you have a good personal credit score. 

There are many ways that a business credit card may benefit your new startup. First, a well-managed business credit card might help you build good business credit for the future, if the card issuer reports the account to one or more of the business credit reporting agencies. And a business credit card can also be valuable for helping you keep personal and business expenses separate. 

You can also use a business credit card to help you manage business cash flow. However, it’s best to pay off your full statement balance each month if possible to avoid paying expensive interest charges on the account. 

Finally, some business credit cards feature valuable rewards or cash back benefits. And while you should never spend extra money to chase rewards, there’s nothing wrong with earning extra perks on purchases that you already need to make for your business anyway. 

6. Crowdfunding

Crowdfunding is another strategy that some entrepreneurs use to generate funding for new startups. Websites like Kickstarter and Indiegogo are examples of helpful tools that can help entrepreneurs raise small amounts of money from a large number of investors. 

In addition to equity crowdfunding (as described above), some small business owners use debt crowdfunding to borrow small amounts of money from numerous lenders. Donor crowdfunding is another option to consider as it allows entrepreneurs to raise donations to support their business goals. 

When the crowdfunding process is successful, it can result in an influx of startup funding to support a small business’ goals. However, results can vary and many entrepreneurs find that crowdfunding campaigns fall short of reaching their funding needs.

7. Venture capital

You may be able to get funding from investors for your startup in the form of venture capital investments. With venture capital, you give up partial ownership in your business in exchange for investments. 

Venture capitalists take on a lot of risk. There’s a chance these investors could lose all of their money if a new business venture doesn’t succeed. As a result, most venture capitalists typically focus on working with companies that display high-growth potential. 

As mentioned, you typically need to be prepared to offer partial ownership in your company in exchange for venture capital investments. You might also have to agree to allow investors to play an active management role as well, or at least have a seat on the board of directors. By taking a more active role in the startups in which they invest, venture capitalists often aim to improve their chances of success. 

8. Startup accelerators

A startup accelerator is a small business mentoring program that has the goal of accelerating the growth of your new business venture. Typically, you must apply to be accepted into a startup accelerator, and you’ll need more than a good business idea to qualify. Many startup accelerators require startups to have an actual product (or at least a prototype) ready to produce and promote. 

If a startup accelerator program approves your application, it will typically require you to sign over a percentage of equity in your company (often 5% to 10%) to secure a spot in the training program. Should the accelerator help you find other investors, you may have to surrender additional equity to secure more startup capital in the future.  

9. Small business grants

Small business grants represent another unique and appealing way for startups to seek funding. Unlike business loans and other types of financing, you do not have to repay grants, nor does this type of funding feature the added expense of interest or fees. 

On the other hand, competition tends to be high for small business grants. Therefore, you should be prepared to conduct research and often submit numerous grant applications if you hope to use this strategy to fund your new business venture. 

Even if you apply for dozens of grants, there’s no guarantee that you’ll receive the funding you seek. But it doesn’t hurt to try as long as the process doesn’t become so time-consuming that it keeps you from completing other important tasks in your startup business journey.

10. Personal savings and credit

Many small business owners rely on personal savings or personal credit to fund their startup business ventures. The SCORE Foundation (powered by the SBA) says that 78% of startups receive capital from personal savings or income from another job. MasterCard® research also shows that 46% of small businesses use personal credit cards. 

It’s important to understand that using personal funds or credit to invest in your own startup carries significant risks. For example, some entrepreneurs might withdraw funds from savings or retirement accounts to launch a new business venture. Yet before you consider taking such a big risk, it’s important to consider what would happen if the new business failed and make sure that possibility is something you could survive. 

11. Family and friends

Some small business owners have the privilege of being able to turn to family and friends for support of their new business ventures. And whether your loved one wants to get involved as an investor, a lender, or a donor, receiving a helping hand from someone close to you can mean the world when you’re working hard to turn your business dreams into reality. 

According to NorthOne, around 10% of small business owners used funds from friends or family in 2021. Yet before you accept loans, investments, or donations from loved ones, it’s important to consider the potential hidden cost. 

Even the best-made business plans do not always succeed. If your startup fails and you’re unable to repay your loved one (or if their investment turns into a bad one), that loan or investment could become a financial loss for your friend or family member and damage important relationships. So, before you accept any startup funding from loved ones, it’s important to put all of the loan or investment terms in writing and have an honest conversation about the risks involved.

Next steps

There are many different ways to get startup capital for your business without a traditional bank loan. So take the time to review your options and figure out which ones work the best for you. If you decide to borrow money for your startup, it’s also wise to compare multiple financing options to make sure you find the best deals available for your situation. 

As a responsible business owner, it’s also important to understand how much financial assistance you need and can afford to repay. Before you apply for any financing you should have a plan in place to pay back the money you borrow without putting yourself or your new business under financial strain.

When you're a small business owner, keeping your finances organized is crucial to your success—and it all starts with a good system for tracking your business expenses. Expense tracking is the gateway to cutting costs, improving cash flow, and optimizing your deductions during tax time.

Long gone are the days of balancing a checkbook and keeping an Excel spreadsheet. Now, there are dozens of tools out there that help business owners automate expense tracking and harness financial data that can level up your business. Here are some of the best tips and tools for tracking your small business expenses.

How to Track Business Expenses

  1. Open a Business Bank Account
  2. Get a Business Credit Card
  3. Get an Accounting App
  4. Evolve Your Tracking Methods
  5. Keep Your Business Receipts
  6. Record and Categorize All of Your Expenses
  7. Consider Consulting an Accountant for Tax Planning

1. Open a Business Bank Account

Many businesses start as solo operations, and owners in these situations often focus on gaining traction and ignore everything else. It’s easy to create an accounting nightmare for yourself when that causes you to neglect the accounting function early on.

Business owners often run into this problem after a year or so of operations when they have to file their taxes for the first time.

For example, they might look back at the year and find they have no idea how large a tax deduction they can take for their travel expenses because each trip included some unknown amount of personal expense transactions. Come tax season, you won't have to dig through your statements and transactions to determine which expense was for your groceries and which was for your new office desk.

To avoid that issue, open a business bank account before you do anything else. Split your business and personal expenses as soon as possible by opening up separate accounts for your company. That usually includes a checking account and a credit card.

That said, they don’t have to be official business accounts, which may have different requirements or costs than personal ones. You can still use a card in your name as a sole proprietor. Just keep your funds separate to create a distinct paper trail.

You'll also get perks like checks with your business name on them, which makes your transactions appear more professional. Opening a business account and keeping it in good standing will help you build a business banking relationship as well, which may help you out when it comes to apply for a business loan.

2. Get a Business Credit Card

Contrary to popular belief, it’s not usually necessary to keep the receipts for all your business expenses. Feel free to ditch that messy shoebox crammed full of paper copies.

While business owners used to need those receipts for tax expense reporting purposes, they’re not as beneficial anymore. You generally only need to have documentation that proves the following:

  • What you purchased
  • When you purchased it
  • How much it cost you

Fortunately, as long as you make your business purchases with dedicated business accounts, you’ll usually find all of that information in your bank statements and credit card bills.

Nowadays, you’d likely only need to keep an expense receipt if you want more insight into a transaction than a line item on a statement could give you.

For example, if you paid $1,500 to Amazon you might not be able to tell what it was for from your business credit card bill. You may need a receipt to document that $1,000 was for your new computer while $500 was for supplies.

However, you still don’t need to keep any receipts in paper form. It makes them far too easy to lose or damage beyond legibility. Take pictures of them instead and save the images in a folder for your records or auto-upload it to your bookkeeping software.

3. Categorize Your Expenses

Whether you complete your business purchases with a credit card, debit card, or cash, you need to have a system for categorizing them. It’s not enough to know that your business spent $500 last week. You need to keep track of which deduction to take.

In general, there are three ways to do this. The old-fashioned way is to keep a document or spreadsheet and manually log every transaction there. If your business pays for things in cash, you'll have to use that method.

However, there’s little reason to pay for anything in cash anymore. If you want to make tracking business expenses easy, always use a credit or debit card and create an electronic record for your transactions.

That opens up two other options for categorizing business expenses, both of which are superior to tracking things by hand. Namely, you can let either your bank or accounting software assign each expense category, manually updating them only when necessary.

Which option makes more sense for you depends on your needs. If you have a relatively low volume of expenses and little complexity, you can probably use your bank account or credit card statements to stay organized.

However, the more sophisticated your business transactions become, the more likely you’ll need bookkeeping software to stay organized. This makes it much easier to adjust your digital records directly.

4. Schedule Regular Check-Ins

Many business owners are uninterested in managing the financial side of things. They start their companies because of ambition or passion, and bookkeeping is significantly less exciting. As a result, it’s easy to procrastinate on the issue.

Unfortunately, tracking business expenses isn’t something you can neglect for long. Do you remember your days back in school when you received year-long projects? If you started at the last minute, you’d never be able to catch up in time.

Business expense management is a lot like that. You have the whole year to get your financial records in order, and you can’t afford not to use that time. Procrastination causes all sorts of problems, such as:

  • Forgetting the purpose or details of expenses
  • Compounding any early accounting mistakes
  • Creating a massive headache for yourself during tax season

Conversely, if you stay on top of your bookkeeping from day one, everything goes much smoother. Expenses are fresh in your mind when you categorize them, fixing mistakes earlier prevents you from making them again, and you don’t need to rush at tax time.

Ideally, you should check in with your business expenses every month. If you don’t have enough activity to make it worthwhile, you can use a quarterly schedule instead.

You should generally check your expenses at least quarterly because that’s how often you need to make estimated tax payments. If you don’t know how much taxable income you had in the last quarter, you might not know how much you need to pay.

5. Finalize Your Financial Statements

Ultimately, business owners track their transactions to translate them into a balance sheet and income statement. These documents detail your business finances, including assets, liabilities, revenues, and expenses.

At the end of every year, you’ll need to update your financial statement to reflect the activity from the previous twelve months. Readers can use them to determine how much you earned or lost and your subsequent financial position.

Your financial statements essentially define your business, and you’ll need them to inform many different processes, including: 

  • Calculating your annual tax liability
  • Assessing the success or failure of your operation
  • Determining whether you qualify for a business loan

Bookkeeping software is especially helpful at this stage. Creating your balance sheet or income statement in a spreadsheet is laborious and makes you susceptible to human error. You have to build the formulas yourself, and one mistake can throw everything off.

Meanwhile, bookkeeping software like Lendio's software can automatically categorize your transactions, generate your financial statements, and then update them in real-time in connection with invoicing software. Give it a try today!

6. Analyze Your Business Expenses

Once you have an accurate idea of your business’s spending trends, you have everything you need to pinpoint potential problems. More specifically, you can look for areas where you’re spending more than you’d like and make adjustments as needed.

Overspending doesn’t necessarily mean you were irresponsible with your budget like it would in your personal life. It could also mean you ran into surprise operating expenses or that costs ended up being higher than you expected.

As a result, tracking expenses can help you develop more accurate expectations, learn lessons from variances, and find areas where you can save money. For example, you could plan future estimated tax payments using your current revenues and expenses.

Bookkeeping software is also great for this kind of analysis. You can use it to facilitate many beneficial activities, like generating an expense report, comparing multiple data ranges, or drilling down into a financial statement.

7. Consider Consulting an Accountant for Tax Planning

With accurate financial records in hand, you can start to refine your tax strategy. If your business is sufficiently sophisticated, with reasonably high revenues and expenses, it’s often worth visiting an accountant for advice.

That doesn’t mean you have to hire one as an employee. Many small businesses don’t have the cash flow or the need to do that. Just reach out to a Certified Public Accountant (CPA) office and contract them out to help you with your tax strategy.

With an organized business expense tracking system and clean financial statements, any CPA would be happy to work with you. It makes their job much smoother, saving them time and you, money.

They can help you lower your tax liability each year by reorganizing your business’s legal structure, finding all potentially deductible expenses, and leveraging contributions to tax-advantaged accounts.

Reap the Rewards of Meticulous Tracking

Tracking all your business expenses is a lot of hard work—but it’s well worth the cost. With accurate expense data, you’ll be able to create dependable budgets, cash flow forecasts, and financial reports. You’ll know where you’re overspending and what expenses you need to cut or adjust to turn a profit.

With historical data to look at, you’ll know when the seasonal sales are coming and when the expenses tend to accumulate. Knowing this, you can prepare your business with a cash cushion or with the right small business loan.

Come tax season, you’ll be relaxed (or more relaxed) knowing the hard work is already behind you. If you choose to hire an accountant to handle your taxes, you’ll pay a smaller bill since they’ll have far less to do. Plus, you’ll take advantage of more tax deductions and credits, lowering your tax burden and saving your business extra cash.

Often, becoming a profitable business doesn’t require you to double your sales—it requires you to cut your costs. With expense-tracking data to guide your decisions, you’ll be able to confidently remove unnecessary expenses and prioritize the costs that move the needle. No, expense tracking isn’t always the flashiest administrative task, but it’s a necessary one.

The word depreciation strikes fear into the hearts of many. If you’ve taken an intro to accounting class, then a cold sweat may trickle down your spine as you recall calculating dreadfully confusing amortization schedules.

For small business owners, however, depreciation (done right) is a powerful tool not to be feared. Depreciation gives investors and lenders a more accurate look at your company’s financials, and it’s also a way to score sweet tax savings, too.

Take a hot shower, shake off the cold sweats, and get ready for a straight-line walk down depreciation lane. First, let’s start with the basics: what exactly is depreciation?

What Is Depreciation?

Depreciation is a way to allocate the cost of an asset over its useful life. Basically, when you buy something, it loses value over time due to use, wear and tear, and simply because it becomes outdated. While there might be nothing wrong with your iPhone 11, depreciation is the reason you can barely get $100 for it even though you bought it for $700 a few years ago.

Buildings, equipment, and computers aren’t the only things that depreciate. Your intangible assets like patents, copyrights, and software can all depreciate, too.

Depreciation can save your net income when it comes to the assets your business needs. For example, if you’re in the trucking business and need a big ol’ $150,000 truck to operate, you know you’re not going to recoup that cost for years to come—and depreciation understands that, too. 

That’s why depreciation empowers you to expense the value of your asset over the life of its usefulness. Thanks to this method, you’re not going to suffer an annual loss every time you make a major investment in your business—which is a huge perk when you’re trying to get a bank or alternative lender to loan you some cash.

What Assets Depreciate?

According to the IRS’s Publication 946, vehicles, machinery, heavy equipment, computers and office equipment, and real estate (excluding land) are all depreciable assets. In addition, assets must meet the following requirements:

  1. You must own the asset.
  2. You must use the asset for business- or income-producing activities. 
  3. Your asset must have a determinable useful life.
  4. Your asset must be expected to last at least 1 year.

In certain scenarios, even intangible assets like patents, copyrights, and software can be listed as depreciable.

How Depreciation Can Help Your Business

As a business owner, you’ll inevitably take out a loan or front the costs to acquire specific items for your business. Whether that’s a fleet vehicle, a new piece of specialized equipment, or some other asset doesn’t matter. Whatever you purchase will likely lose its value over time. Instead of deducting the total amount of the purchase up front as an expense, depreciation allows you to recover the cost of the property over the course of its life. That means you can make some of the money you spent on it back each time you file your taxes—or at least reduce the amount of your taxable income, which boosts your tax savings.

Here are a few fantastic advantages that will make depreciation your business’s best friend:

Tax Savings

Several business expenses are tax-deductible, and depreciation is no exception. By claiming depreciation expenses on your assets, you lower your taxable income, increasing your tax savings. When business is slow and the revenue is trickling, some small business owners decide to depreciate using the accelerated method: this method allows you to claim larger deductions early on, helping to offset the price of the asset (more on this later).

Expense Reporting

Depreciation expensing paints a clear picture of how you’re using your capital. When you estimate the cost of an asset’s use over a period of time, you’re then able to compare how much revenue it generated (over that same period of time). When you can compare the expense and the resulting income side-by-side, you’ll have a good idea of your efficiencies or inefficiencies and be able to adjust accordingly.

Accurate Asset Valuations

It’d be misleading to you (and potential investors and lenders) if you only recorded the initial value of every asset you purchased. Because the truth is, that van you bought for the company a few years ago may be worth less than half its purchase value now. By depreciating your assets, you’ll know at any given time how much potential liquidated capital you actually have.   

Cost Recovery

If you bought a $5,000 freezer and it depreciates over the 5 years of its useful life, then each year you’d depreciate the asset by $1,000. You’d also know that you should save $1,000 each year so that in 5 years, you’ll have enough money to replace the freezer. Without the depreciation expense, you may not have saved enough money by the time the asset needed replacing, or you could have saved too much—needlessly tying up a portion of your capital.

Types of Depreciation

There are 4 standard depreciation methods businesses use. One isn’t better than the other, per se—you’ll just need to run the numbers for each scenario and see which is most appropriate for your operations. While the straight-line method is the most common, take your time before you choose. The hassle of calculating a more complicated method may be worth the immediate thousands in tax savings.

1. Straight-Line Depreciation Method

The straight-line depreciation method expenses an asset at an equal amount each year over its useful life. Most small business owners love this method because the formula is so downright simple: you just subtract the asset’s salvage value from its initial cost, and you divide that number by its useful life. Voilà—that’s the amount you depreciate each year. Here’s the equation:

(Asset Cost – Salvage Value) / Years of Useful Life

Let’s look at a practical example. Let’s say you want to depreciate a copy machine for your business. You’d open the IRS’s Publication 946 and find that a copy machine is classified as a 5-year asset. You bought the copy machine for $2,000, and you estimate you’ll be able to salvage the copy machine for $200:

($2,000 – $200) / 5 = $360

There you have it—each year, you’d depreciate the copy machine by $360.

2. Units of Production Depreciation Method

The units of production depreciation method is more appropriately applied to assets used to produce goods or services. If the age of an asset matters less than how much it can produce before it dies, then consider using this method. For example, you might want to use units of product depreciation on a mold used in your assembly line or on a piece of equipment used to make a t-shirt.

Units of production depreciation makes sense to use when the use of your asset fluctuates. If your use is consistent, then it’s more simple to use the straight-line method. However, if varying seasonal demand puts an inconsistent strain on your asset, units of production depreciation might give more accurate insights about the life of your equipment.

Here’s the equation you’d use to calculate units of production depreciation:

(Asset Cost – Salvage Value) / Estimated Total Units of Production

Let’s look at an example. Let’s say you bought a stone oven that you estimated could produce 10,000 pizzas before you needed to replace it. The oven cost $10,000, and you believe it’ll salvage for about $1,000:

($10,000 – $1,000) / 10,000 = $0.9

So each pizza you produce would incur a $0.9 depreciation expense for your oven. If you cooked up 1,500 pizzas over a year, your oven would have depreciated $1,350.

Since you’re likely not counting how many pizzas come out of your oven, units of production depreciation may not be the best method for every business. Manufacturers will benefit the most from this depreciation schedule since they keep a closer eye on the inputs and outputs of all their operations.

3. Double-Declining Balance Depreciation Method

The double-declining balance method may sound like a hip new dance the youngsters are doing, but it’s much cooler than that. With this method, you depreciate more of an asset’s value upfront and less and less over time. It’s similar to how you might approach your dinner plate when you’re dangerously hungry—you attack and eat your first helping lightning quick, and then you peter off and eat at a more mellow pace for the rest of the meal.

This depreciation method leads to bigger tax write-offs in the years right after you’ve purchased your asset and smaller write-offs towards the end of its useful life. Here is the formula for calculating double-declining balance depreciation:

2 x Basic Depreciation Rate x Book Value

Let’s break the formula down. First, let’s find the basic yearly write-off. The basic yearly write-off is the cost of your asset divided by its years of useful life:

Basic Yearly Write-Off = Cost of Asset / Years of Useful Life

To find the basic depreciation rate, divide your basic yearly write-off by the cost of the asset:

Basic Depreciation Rate = Basic Yearly Write-Off / Cost of Asset

Confused yet? Don’t worry. Let’s look at a practical example, and then you’ll have a good understanding.

Let’s say you bought a taxi for $10,000. According to the IRS, a taxi would depreciate on a 5-year schedule. So the taxi’s basic yearly write-off would be $10,000 divided by 5:

Taxi Basic Yearly Write-Off: $10,000 / 5 = $2,000

Now, let’s find the taxi’s basic depreciation rate. You’d divide the basic yearly write-off ($2,000) by the cost of the taxi ($10,000):

Taxi Basic Depreciation Rate: $2,000 / $10,000 = 0.2%

Now, plug that number into our double-declining balance depreciation formula:

Taxi Double-Declining Balance Depreciation: 2 x 0.2% x $10,000 = $4,000

So, after the first year, you’d have a $4,000 depreciation expense for the taxi. But next year, when you calculate the depreciation, the taxi’s book value will only be $6,000 ($10,000 – $4,000). At that rate, the second year’s depreciation expense will be $2,400. Then, the third year’s depreciation expense would be $1,440.

Hopefully, with this example, you can see how the asset starts at a super high depreciation expense, and that number starts to dwindle over time. So, why would anyone want to use the double-declining balance depreciation method when the straight-line method is obviously more straightforward?

4. Sum-of-the-Years-Digits Depreciation Method

The sum-of-the-years-digits depreciation method (SYD method), like the double-declining balance method, is another form of accelerated depreciation. It’s not quite as fast as double-declinching, but it’s still quicker than straight-line depreciation.

To calculate depreciation using the SYD method, assume you bought a pickup truck for $30,000 with a salvage price of $10,000 after 5 years. Here’s the formula you’d follow:

(Remaining life / Sum of the Years Digits) x (Cost of Asset – Salvage value)

Remaining life would be how many more years of useful life the asset has left. So, the first year you depreciate, it’d have 5 years of useful life. The second year you depreciate, it’d have 4 years of useful life remaining.

Find the sum of years digits by adding how many remaining years of usefulness are left after each year. So, for a 5-year asset, the sum of years digits would be 5 + 4+ 3 + 2 + 1 = 15.

Plug those numbers into the equation for the first year, and you’d get…

SYD Depreciation Expense Year 1: (5 / 15) x ($30,000 – $10,000) = $6,666

Do it again for the second year, and you’d get…

SYD Depreciation Expense Year 2: (4 / 15) x ($30,000 – $10,000) = $5,333

Choosing the Right Depreciation Method

There’s no one right way to depreciate your assets. Your business is free to adopt whichever method is most appropriate (and beneficial) to your operations. Depending on your current financial situation or even your predicted tax bracket in the coming years, you may opt for one method over another.

The straight-line method is the most commonly used because it’s easy to calculate, causes fewer reporting errors, and is simple to report on tax returns. However, you may use an asset heavily at the beginning of its useful life and less as times goes on (maybe because you expect to buy more of that asset as you expand). If that’s the case, the double-declining depreciation method may more accurately describe the asset’s expense.

“The “best method” is the one appropriate for your business and situation, says Morris Armstrong, an agent at Armstrong Financial Strategies. “Sometimes, people want to write something off as quickly as possible, even if they do not have the annual income to warrant it. So they accelerate the deduction schedule, only to realize later on that they would have been better off taking the depreciation at a slower, more consistent pace. You should run the various depreciation-calculation scenarios through the tax program with an eye not only on the current return but on returns down the road and the condition of your company in future years as well.”

In the end, it’s up to you to decide how you’re going to depreciate an asset. You don’t have to depreciate all your assets the same way, but you need to make sure you’re consistent with each asset.

The Bottom Line

For those of us non-accountants out there, we don’t have to pretend that depreciation is fun. Because it’s not. But, hopefully, you can now see how incredibly useful it can be for your small business. Get your depreciation strategy right, and you could save a boatload of cash when you need it. Get it wrong, and you could find yourself in an unnecessary tax crunch at an inopportune time.

While you may have an accountant or defer all your tax obligations to one, it’s still good to understand the fundamentals so you can help make important business decisions. With this basic understanding, you now have the knowledge you need to leverage depreciation to its maximum potential. Congratulations, entrepreneur!

While it’s easy to dislike depreciation (what’s to like about a whole bunch of math?), keep in mind all the good it can do for you and your business. Remember: don’t hate, depreciate.

More than 11.6 million businesses are owned by women in the US. But the amount of funding they receive to launch or grow those businesses is miniscule compared to their male counterparts: in fact, only 4.4% of small business loan funds are issued to women-owned companies. 
To help combat this major economic disparity, many companies and organizations offer small business grants for women. Here are some top picks available, as well as alternatives to explore. Get inspired to grow your company, whether you need a small business idea or already have a concept in motion.

Amber Grants for Women

The Amber Grant is a monthly grant-making program funded by WomensNet. Each month, the organization’s small-business grants program gives $10,000 to at least one female business owner. On top of that, they’re awarding an additional $25,000 to one of those 12 monthly winners at the end of 2022. The minimum requirements to apply include:

  • Business is at least 50% women-owned
  • Business is based in the US or Canada
  • Applicant must be at least 18 years old

Applications are accepted through the last day of each month. After that, the WomensNet Advisory Board chooses five finalists, which are then discussed and voted on to choose a winner. The finalists are announced on the 15th of each month and the winner is announced by the 23rd. 

The WomensNet website also features resources for small business owners, grant application tips, and interviews with previous grant winners. It’s an inspiring place for any business owner.

She’s Next From Visa

Each year, Visa offers the She’s Next grant program for companies run by Black women founders. These grants for small business startups and established companies alike are awarded on an annual basis. Sixty grant recipients each receive a $10,000 grant, as well as a one-year IFundWomen annual coaching membership.

The program includes 6 cities in the US: Los Angeles, Washington, DC, Miami, Chicago, Atlanta, and Detroit. Additionally, Visa is expanding the grant program globally to offer funding to women entrepreneurs in MENA (including Egypt, Saudi Arabia, Morocco, and the United Arab Emirates) and in Vietnam.

In total, the She’s Next program has made nearly 150 grants totaling $1.6 million in funding to women-owned businesses. There’s also a fashion-specific version called She’s Next in Fashion, which applies to women business owners in the fashion and beauty industry.

Tory Burch Foundation Annual Fellows Program

The Annual Fellows Program from the Tory Burch Foundation is designed to help early-stage companies owned by women founders. The program includes a $5,000 grant to be used for business education. On top of the funding, the fellowship has both live and virtual education courses as well as a robust networking community. Each fellow also gets to take a trip to New York City and visit the Tory Burch offices for additional learning and networking. 

Applicants must be at least 21 years old, identify as a woman, and own at least a 51% stake in the business. She must also be a legal US resident and proficient in English. The company must be between 1–5 years old and already be generating revenue (typically at least $75,000 annually). Any industry is eligible, as long as the company operates as a for-profit.

Fearless Fund

Fearless Fund makes small business grants for Black women and women of color who are seeking pre-seed, seed level, or Series A funding—the program is run by women of color as well. There are a few different grant programs available.

Fearless Strivers Grant Initiative: The fund awards 11 grantees $10,000 grants as well as digital tools. Businesses can be located in Atlanta, Birmingham, Dayton, Los Angeles, New Orleans, New York City, or St. Louis.

WOC Grant Program: The Fearless Fund partners with the Tory Burch Foundation and The Cru to award grants between $10,000–20,000. Eligibility requirements include revenue generation (recommended minimum of $100,000), 1–5 years in business, and a woman of color as owner.

Cartier Women’s Initiative

The Cartier Women’s Initiative provides funding for women-led and women-owned businesses around the world. Any sector is eligible, so long as the company aims to have a social and/or environmental impact. There are 3 tiers of financial award grants available: $30,000, $60,000, or $100,000. The Initiative also provides human capital and social capital support. 

Eligibility requirements include:

  • For-profit companies
  • Early-stage (1–6 years)
  • Less than $2 million in fundraising
  • Positive impact, based on at least United Nations Sustainable Development Goals
  • Applicant must be a woman who holds a primary leadership position at the company
  • Majority ownership must be maintained by founders
  • English proficiency
  • Applicant must be 18 years or older

Women Founders Network Fast Pitch Competition

The Women Founders Network Fast Pitch Competition awards $55,000 in cash grants and over $100,000 in professional services each year. There are 2 company categories: tech/tech-enabled or consumer/consumer packaged goods/non-tech. 

Here’s what you need to be eligible to apply:

  • Business must have a woman as founder, co-founder, CEO, or majority owner
  • Must participate in the Fast Pitch event
  • Maximum $750,000 in outside funding (not including research grants or PPP loans)
  • US-based business
  • Pre-revenue companies allowed
  • No life sciences, nonprofit, or CBD/cannabis companies

Thes grants can be used for small business startups, since pre-revenue companies are eligible to compete—but there does need to be some sign of customer interest.

Caress Dreams Fund

The Caress Dreams Fund program works with dozens of women of color entrepreneurs and awards each one a $5,000 grant. Grant recipients also receive coaching and creative services to implement their own fundraising campaigns. The 12-week fundraising program runs each fall and participants also get a 1-year coaching membership. 

In order to apply, the business must:

  • Be owned and operated by a woman of color
  • Have an annual revenue of at least $10,000
  • Be located in the US 
  • Have an owner who identifies as a woman and is at least 18 years old
  • Have an active digital presence and supporting media

Caress and IFundWomen of Color also provided 200 small business grants for women during the COVID-19 pandemic, which totaled $500,000.

Comcast RISE

The Comcast RISE program stands for Representation, Investment, Strength, and Empowerment and provides multi-year grants to businesses that are majority owned by women or people of color. To date, the program has provided more than $60 million in grant dollars as well as marketing and technology services. 

In addition to the majority ownership requirement, business applicants must also meet the following: 

  • Independently owned and operated (no franchises)
  • Registered in the US
  • Operating for at least 1 year
  • Located within the Comcast Business or Effectv service area footprint

The annual deadline to apply is typically the middle of October, but it’s smart to check on any changes each year.

Jane Walker First Women Grant Program

The Jane Walker First Women Grant Program is another IFundWomen partnership, this time with the Johnny Walker Whiskey brand. The program will fund 30 women-owned businesses in the following industries: entertainment and film, music, sports, STEM, journalism, and hospitality. Each recipient will receive a $10,000 grant and a 1-year coaching membership with IFundWomen.

Grants.gov

Still wondering “How do I get a grant for a small business?” Good news: it’s possible to search for government opportunities via the federal website Grants.gov. You can search by a variety of filters including keywords or eligibility based on location, nonprofit or Native American tribal status, small businesses, and more. 

Grants could be made by the federal government or distributed to state and local government and agencies. While not every opportunity is directed specifically to women, there could be multiple grants available for all small business owners—including female owners. Plus, available grants are always changing, so you can always check back for new opportunities. 

Small Business Innovation Research and Small Business Technology Transfer Programs

The Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (SBTT) programs help businesses support federal research and development needs. While not designed specifically to support women entrepreneurs, both programs do encourage women and socially or economically disadvantaged individuals with innovation and research and development capabilities to apply.

There are more than 5,000 grants awarded each year, and basic eligibility criteria include:

  • For-profit, US-owned and operated company
  • Under 500 employees
  • Funds must be used for research and development

Once awarded, funds from these programs may be used for the first 2 phases of development: first is the concept development phase, which lasts between 6 months and a year with amounts ranging from $50,000–250,000. Phase 2 is the prototype development stage, which lasts for 24 months. Funding amounts range from $500,000 to $1 million. (The third phase is commercialization—but funding cannot be used for this stage.)

What Can You Use Small Business Grants For?

Uses for small business grant funds depend on the requirements of the individual grant program. Oftentimes, the funds may be used for however you see fit as a business owner. However, federal research and development grant programs have strict requirements on how the funds may be used. 

No matter what grant program you apply for, here are some stipulations you may need to meet once you receive the grant funds.

Updates to the Grantor: Some grantmaking organizations may require you to provide updates based on your business progress, particularly if the funds are meant to be used in a specific way. 

Contingencies: You may also find grants that require contingencies to raise additional or matching funds on your own in order to receive the original grant funds. This is most common with state or local grants, although some private programs use grants as a kickoff to additional fundraising efforts. 

Federal and state restrictions: The strictest grant requirements come in the form of federal and state grants because they’re not designed to grow businesses. Instead, they are designed to achieve specific program goals.

Alternatives to Business Grants

There are a number of alternatives to business grants to help launch or grow a woman-owned business, particularly in the form of small business loans for women. Unlike grants, business loans must be repaid in full, including interest. Some may involve additional fees as well.  

The below options aren’t limited just to women, but you may find them particularly useful as a woman business owner:

Online business loans: An online business loan is ideal to apply for when you need cash quickly for your business. There typically aren’t restrictions on how you can use the funds. Loan terms range from 1–5 years and, depending on your business, can go as high as $2 million. Lenders review your credit score, time in business, collateral, and financial statements. 

SBA loans: SBA loans are backed by the federal government, although you still apply directly through a private lender. There are many different types of SBA loans depending on your needs. Two of the most popular options include:

  • SBA 7(a) loans: These have a broad use, such as purchasing land, paying for construction, buying or expanding a business, refinancing debt, or operating expenses. 
  • SBA 504 loans: These are used for buying property, like real estate, machinery, or land, or for renovating an existing property. 

Startup business loans: Startup business loans are used to help launch a business in its early stages. You may need some revenue under your belt in order to qualify–but it’s still possible for early companies to qualify. 

Both grants and small business loans can help you  fund your company’s next steps successfully—and Lendio can help pair you with the best business loan available for your company.

One of the hardest things for new business owners to understand is that their earnings and cash flow aren’t the same thing. Your business earns money every time it makes a new sale, but that doesn’t mean it has a positive cash flow.

Cash flow refers to the money coming in and out of your business, and it’s a good indicator of your company’s financial health. That's why a daily cash report, which tracks your cash flow, is ideal for helping you make better financial decisions for your business.

What Is a Daily Cash Report?

A daily cash report is a detailed report that outlines how much cash your business currently has on hand. It tracks how much money is coming in and out of your business, and the report is updated on a daily or weekly basis.

This report shows you how much cash you have on hand, not just today but over the next week or month. This makes it an excellent tool to help businesses with short-term financial planning, especially those with tight margins. 

A daily cash report tracks all aspects of the cash cycle, including your accounts receivables and payables. This information helps you make better financial decisions regarding your business.

How to Create a Daily Cash Report

Many people find it helpful to use a daily cash report template to get started. Once you’ve done that, here are five steps you can take to create your report. 

1. Choose your date range

The first step is to figure out how far you want to plan for and choose a date range. Do you need to know how much cash you have for the month, or are you just looking at the next week?

You can plan out as far in advance as you would like, but keep in mind your projections will be less accurate the further ahead you plan. And new businesses may need more data to create a cash report for the entire month. 

2. List your income

Next, you’ll list the income you have coming in over the coming days and weeks. This includes sales and non-sales revenue. For instance, you could include any tax refunds, grants, or investments.

Create a new column for each source of income and add them to the correct week or month. If you aren’t sure what your sales volume will be, you can use last year’s sales to make your projections.

3. List your cash outflows

Once you know how much income you can expect, you need to list any outgoing payments. Your cash outflows can include things like:

  • Payroll
  • Rent
  • Tax bills
  • Loan payments
  • Materials

Once you have a list of everything going out of your account, you can add up your total. From there, you can subtract your outgoing cash from your incoming cash to see whether your cash flow is positive or negative. 

4. Adjust your plans accordingly

Hopefully, your daily cash report will show that you have a positive net cash flow and that this trend is improving over time. But what if you don’t have enough cash on hand to pay your bills?

Some people avoid looking at their finances because they’re afraid of this exact scenario occurring. But if you’re short on cash flow one week, it’s even more important to look at the numbers because this allows you to adjust your plans accordingly.

For instance, if you don’t have sufficient cash flow to make payroll, you may need to take out a loan to cover it. If this becomes an ongoing pattern, you may need to cut down on your expenses or the number of employees you have on staff.

5. Use the right tools

When you consistently create a daily cash report, you’ll start to notice trends in your business over time. You can do this with a spreadsheet, but it’s easier if you have the right tools to help you.
For instance, Lendio lets you track your expenses and view your real-time cash flow. You’ll receive alerts every time your business is approaching negative cash flow. And our in-depth reporting features will help you identify key trends in your business.

The Bottom Line

If your company consistently generates positive cash flow, this indicates that it’s in a good financial position. That’s why many investors and lenders require businesses to create a daily cash report. 

But most importantly, understanding your daily cash flow allows you to make more informed decisions about your business. If you need help creating a daily cash report, using a tool like Lendio can make this easier.

If you were in business when COVID-19 began, you may be eligible for the Employee Retention Credit (ERC). Introduced in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the ERC offers a payroll tax credit for wages and health insurance that were paid to employees during that time. 

Despite the fact that the Infrastructure Investment and Jobs Act of 2021 ended this program, qualifying businesses can still claim the ERC for up to five years retroactively. One of the most common questions about the ERC is whether it’s considered taxable income. Keep reading to find out.

What is the ERC?

First and foremost, let’s dive deeper into what the ERC actually is. Put simply, the ERC is a refundable payroll tax credit. It was designed to incentivize employers to keep their employees on payroll during the pandemic. As long as you’re an eligible business, you can receive as much as 50% up to $10,000 in qualified wages per employee or up to $5,000 per employee for 2020 and 70% of up to $10,000 in qualified wages per employee for each qualifying quarter (Q1-Q3) or up to $21,000 per employee total for 2021.

Is the ERC Taxable Income?

Now it’s time to discuss one of the most common ERC questions: Is the tax credit taxable income? The answer is yes and no. 

As a business who acts as an employer, the credit you receive from the government through the ERC is not included as gross income in your federal income taxes.

It does, however, reduce the amount of wages or salaries expenses you can claim as a deduction in your income tax return by the amount you qualified for through the ERC. This increases your taxable income by the amount of the credit for the time period you qualified for the ERC. Any changes made to your income tax return will be done retroactively. 

For example, if an employer paid $100,000 in wages in 2020 and received an ERC of $40,000, the employer would report an expense of $60,000 in wages on their business tax return rather than the full $100,000.

Difference Between a Tax and Refund

It’s important to understand that the ERC is not considered a tax. Instead, it’s a refundable tax credit for qualifying employee wages. For 2020, your business can lock in up to $5,000 per employee. The maximum credit per employee in 2021 is $21,000.

Since the ERC is a payroll tax credit not an income tax credit, you can still receive an ERC credit even if you paid no income tax in the year you qualified. Additionally, because the credit is refundable, you can receive a refund above and beyond what you originally paid in payroll taxes for the time periods you qualify for.

For example, if you qualify for a $30,000 ERC credit, but only paid $10,000 in payroll taxes, you would still receive the full amount of $30,000.

How much money you can qualify for each year from the ERC

Am I Eligible for the ERC?

If your business faced partial or full shutdowns as a result of government orders during COVID-19, you may qualify for the ERC. 

To calculate the ERC, you’ll need to use the qualifying wages you pay your employees during their eligible employer status. Keep in mind that since ERC is a refundable tax credit you may receive a refund in excess of your original tax liability.

What Happens If I Never Applied for ERC?

You might be wondering what your options are if you never applied for the ERC. Since the ERC filing period has passed, you must file an amended return using Form 941-X to claim any credits you may be eligible for.

 Expiration dates for filing amended payroll tax forms for ERC are as follows: April 2024 for 2020 941 payroll tax filings and April 2025 for 2021 941 payroll tax filings. Rest assured, if you didn’t apply for the ERC, you can still do so. Simply amend the return for every quarter in 2020 and 2021 where you meet the criteria for ERC. It’s in your best interest to reach out to a tax professional to help you out. They can help you avoid a denial or delay.

Bottom Line

The ERC is a valuable tax credit you may claim for keeping your employees on your payroll during the COVID-19 pandemic. While it’s not included in gross income for employees, it is subject to expense disallowance rules. Therefore, your wage deduction as an employer will be reduced by your ERC amount which could result in taxable income. If the business wasn't profitable even after the change it would not cause an increased tax burden.

For many people, the American Dream is to take a great idea and turn it into a thriving business. Yet it’s rare that a great idea alone will convince an investor or lender to take a chance on you. Before a lender in particular will approve your application for a business loan, you typically need to prove that you and your business are good credit risks. 

Some borrowers may have trouble satisfying the qualification requirements of traditional commercial lenders—especially startups and small business owners with less-than-perfect credit. This inability to access financing could be a key factor that drove 61% of small business owners to rely on personal funds to address financial challenges in their companies in 2021 (based on a Federal Reserve report). 

If you find yourself in a similar situation where you need business capital, but traditional financing doesn’t make sense, peer-to-peer (P2P) lending could be worth considering. Here’s what you need to know about how this alternative business loan solution works. You’ll also learn whether P2P loans are safe and how to determine if they are the right fit for your small business. 

What is peer-to-peer lending?

Peer-to-peer lending is a method of borrowing money that allows you (aka the borrower) to access funds from multiple investors (aka peers), rather than a single lender or financial institution. Due to this unique borrowing structure, P2P lending is sometimes called person-to-person lending or social lending, as well.

P2P lending platforms utilize technology to bring different investors together to fund an individual loan. Some P2P platforms may even allow lenders to compete with one another to make loans—sometimes (though not always) resulting in more attractive interest rates and loan terms for borrowers than they might receive elsewhere. In other scenarios, borrowers may be able to qualify for financing that they might not otherwise have qualified to receive.

What is a p2p loan?

How does peer-to-peer lending work?

Peer-to-peer lending marketplaces use fintech (aka financial technology) to match would-be investors with would-be borrowers who are seeking various types of loans. It’s important to understand that P2P platforms are not lenders themselves. However, the online platform can help perform the following tasks:

  • Collect and process a loan application from the prospective borrower 
  • Facilitate a credit history and credit score check 
  • Share your potential loan offer (including APR and fees) if you’re eligible for financing
  • Move your loan to the funding stage, if you accept the offer
  • Share your loan listing with investors to see if any are interested in funding it
  • Service funded loans, process monthly payments, and divide payments among investors
  • Contract with third-party debt collectors to collect defaulted debts

Is peer-to-peer lending safe?

The U.S. Small Business Administration (SBA) notes that peer-to-peer loans could be a practical alternative financing solution for small businesses. Yet the agency cautions that there are both benefits and drawbacks to consider before a business decides to move forward. 

As a borrower, one of the first details you should understand about a P2P loan is the cost. In addition to the interest that the investors charge on your business loan, the P2P platform may charge supplemental fees. (Investors may pay fees to the P2P platform, as well.) Of course, any type of financing comes at a cost, but it’s always wise to do the math, so you know what you’re agreeing to pay for a business loan up front. 

For investors, it’s important to know that P2P investments are not FDIC-insured. Therefore, you may face an added degree of risk with this type of investment compared with other options. At the same time, if the process goes smoothly, you might enjoy higher returns than you’d receive from FDIC-insured CDs or savings accounts. It’s up to you to determine your risk tolerance and how much of your portfolio you’re comfortable exposing to higher-risk investments.

Is a peer-to-peer loan right for you?

If you’re wondering whether a peer-to-peer loan could work for your business, there are a few details you’ll want to consider. First, it’s wise to review your credit reports and scores (from all three credit bureaus, if possible). 

A lender will likely review one of your consumer credit reports and scores when you apply for a P2P loan. Therefore, it’s helpful to know the condition of your credit before you apply for financing. You can access a free credit report from Equifax, TransUnion, and Experian via AnnualCreditReport.com once every 12 months. Through the end of 2023, you can take advantage of free weekly credit report access through the same website. 

Next, make sure you’re in a position to afford a new business loan. If you believe your company might struggle to afford a new monthly loan payment, now may not be the time to seek new financing. 

Finally, shop around and compare P2P loan offers from multiple companies. You may also want to consider other types of small business loans. Comparing different financing offers can help you make sure you find the best deal available for your company. 

Debt financing has long been a preferred financing option for small business owners. It’s true that the majority of entrepreneurs leverage their own money to start or run their business, but those funds often fall short of the ultimate need. In these cases, a business loan gives you more control than you’d get with other routes such as angel investors or borrowing from family members.

However, lenders reject the majority of business loan applications. Rather than letting this reality deter you, it should merely encourage you to put your best foot forward whenever submitting an application. There’s no shame in getting denied by a lender. It happens to everyone. What matters is that you try your hardest and put your business in the best position to succeed.

Here’s a closer look at common reasons loan applications are rejected. Some are easily remedied, while others take more effort. The important thing to note is that none of these factors is a death sentence. If you find that one of them contributed to a rejection, simply make a goal to improve it for your next application. With this focus on incremental improvement, anything is possible.

Here are some of the most likely reasons an application gets axed:

You Botched the Application

One of the biggest contributors to loan rejections is also among the most basic: the applicant didn’t handle the process correctly. This includes leaving sections of the application unfinished, entering incorrect information, or failing to include the required documentation.

You can reduce the risk of this fate by preparing your documents ahead of time. You’ll find it’s much easier to write a business plan or locate your tax returns when you don’t do it the night before the deadline.

Put yourself in a lender’s shoes and it’s understandable why they’re sticklers for details. Because lenders make informed decisions based on the contents of your application, forgetting to complete a section, including erroneous information, or neglecting to send the required documents makes their decision much easier. If you can’t be trusted to fill out an application correctly, how can you be trusted with a large sum of money?

Imagine if a friend asked you to borrow money but had no clear idea what they would be spending it on. That kind of disorganization would probably be met with a polite rejection from you. Most people only loan money to a friend if they trust them and have an idea of where the money is going.

Your Credit Score is Lacking

Credit scores result from an algorithm that lenders use to predict how likely you are to repay the money they might provide to you. The determinants of your score come down to relevant factors such as how promptly you pay your recurring bills and how much of your credit card balance you pay off each month.

Business owners have 2 types of credit to watch: personal and business. That’s right—your business has its very own credit report and credit score from Equifax, Experian, and Dun & Bradstreet, the 3 major business credit bureaus.

A low credit score can stem from a history of late payments, unpaid tax liens and judgments, or high use of available credit. But lenders can also ding you for not having established a long enough credit history.

Just because your score isn’t where it needs to be for one loan doesn’t mean you’re out of luck. Each lender has their own standards and they generally aren’t shy about broadcasting them. So when you see credit score requirements associated with a loan, take them seriously. You’ll save yourself a lot of time by not chasing loans you aren’t qualified to receive.

You can turn around a low score by paying down debt, paying your bills on time, and keeping your account balances low. If insufficient business credit is the issue, Credit Karma recommends taking the following actions to establish a credit history:

  • Apply for and use a business credit card.
  • Open a business bank account under your business name.
  • Get a business phone under your business name.
  • Apply for an employer identification number (EIN) from the IRS.
  • Register your business with Dun & Bradstreet to get a free DUNS Number.

Taking these steps—and being consistent—can help you improve your business credit score so you can qualify for financing, maybe even at a better rate.

Your Business is Too Green

Every business needs to start somewhere, and there’s no shame in being a young company. It’s actually something to be proud of because it takes determination to turn your idea into a reality.

But many lenders will be understandably skittish when dealing with businesses that lack a track record. The success rates of a company over two years old are much higher and your banker, by his or her very nature, is highly risk-averse. They usually won’t take a risk on a very young company. You should also know that they will likely use your company tax returns to determine how long you’ve been in business. With that in mind, even if you don’t have much to report, file your returns starting with the first year to establish your company’s age right from the start. Your ability to repay your debt is substantially impacted by the amount of money your business brings in, so the more evidence of cash flow you can provide, the better. And for young businesses, this type of evidence is in short supply.

You Need More Collateral

Many small business loans are secured loans, meaning you need to offer something of value to protect the lender in case you aren’t able to make the necessary payments. Assets used for collateral include vehicles, homes, properties, equipment, and retained income.

Lenders prefer borrowers who have skin in the game—assets offered up as collateral, which the borrower would forfeit if they defaulted on their loan. Before you reapply for financing, document all of your personal and business assets, such as equipment, bank accounts, real estate, vehicles, and even accounts receivable, and then decide which you’d be willing to use to secure a loan. As you work through the list, consider your likelihood to default and what the consequences would be if you had to forfeit the assets.

When you lack an adequate asset to use as collateral, you’ll find that lenders are more likely to turn down your applications. While this can be frustrating for borrowers, it makes sense. If lenders always handed out money without guarantees, it wouldn’t be long before they’d run out of it.

Your Cash Flow is Lacking

When lenders want to quickly assess an applicant, they often start with cash flow. Not only does it show the strength of your business performance, but it provides a glimpse into your ability to manage details and stay on top of expenses.

If your business is new, it often lacks the track record needed to instill confidence. The good news is that certain loan options are ideal for newer businesses. Just make sure your business tenure lines up with the requirements for a specific loan before you apply. Some businesses experience seasonal slumps, which is understandable to lenders. What they’ll want to see is that you can balance your financial obligations year-round. Accounting software makes this easier to accomplish by tracking invoices so you can collect payments promptly. Also, this type of software can quickly create cash flow reports for loan applications.

You Went for the Wrong Loan

There are times when a borrower has all their ducks in a row, yet they’ve simply applied for a loan that isn’t a good match for their business. Perhaps your business doesn’t qualify due to its size or structure, or your business plan calls for using the money in ways the lender doesn’t approve.

The point is that your due diligence needs to take into account the nuances of each lender so you don’t waste time applying for a loan that will never be possible for your business.

Banks look at your debt-service ratio to determine whether you’ve got enough cash flow to make the loan payments. To calculate the ratio, take your annual net operating income and divide it by your annual debt payments. Higher numbers are better. You’ll need at least 1.15 for a Small Business Administration (SBA) loan guarantee, and lenders could require a stronger ratio. Next time you apply, run your anticipated loan amount through an online loan calculator to make sure you’re not overreaching.

At the other end, it’s just as much work for lenders to extend a large loan as a small one, but they make more money on the large one. If you’re finding yourself feeling pressured to apply for more than you need just to qualify, consider alternative sources of financing, such as crowdfunding, angel investors, or an SBA microloan.

Your Business Plan is Underwhelming

Many lenders ask for business plans as part of the application process. They’ll review your plan to see how you intend to spend their money, as well as to gauge your organizational and strategic abilities.

Writing a business plan speaks volumes about whether your company is a good investment, and it’s one of the primary tools lenders use to evaluate business loan applications. If yours wasn’t up to snuff the last time you applied for a loan, take the time now to whip it into shape. In addition to descriptions of your company and its structure, your product or service, and your sales and marketing plan, the SBA recommends that you present the following:

  • A market analysis
  • Financial projections based on your income and cash flow statements, balance sheets, and budgets
  • An appendix with documentation supporting your application

Applying for a business loan is never easy, but it’s preferable to letting cash-flow issues keep your company from growing. By shoring up your credit, keeping your requested loan amount realistic, and wowing lenders with a business plan that shows you and your company in the best light, you’ll maximize your chances of getting the funding you need to take your business to the next level. 

Never rush this stage of the application. Your business plan is your sales pitch, as well as your guiding light. If done correctly, it will sufficiently impress the lender so that you can obtain the financing you require. Once you have the money, it will then serve as your blueprint for spending it in the most effective way possible.

Your Financial Statement are Lacking

Not having accurate, informative, timely, accessible, and comparative financial data will hurt your chances if you need to raise money and get a business loan, underscoring just one of the reasons to make sure this part of your business is handled professionally. Here are the most common errors and pitfalls that will hinder your business from raising funds:

Revenue Recognition

Actually “earning” your revenue is almost never directly correlated to when you send an invoice to or receive money from your customers. Each industry has one right and many wrong ways to recognize revenue, and bankers and sophisticated investors will be familiar with each. If you are a software company and the banker does not see that you have an account called “Deferred Revenue” on your balance sheet, for example, they will lose confidence in your ability to run your business.

Gross Margin

There are two main expenses in a business, and they should be separated on your profit and loss statement. Specifically, all expenses directly related to the manufacturing of your products or the fulfillment of your services, also referred to as costs of goods sold or cost of sales, should be subtracted from your net revenue (correctly recognized as mentioned above) to determine your gross profit. Then divide your gross profit into your net revenue to find your gross margin. Many businesses fail to show this separate from the rest of their expenses and net profit before taxes, but it is a number bankers and investors want, and need, to know.

Balance Sheet Reconciliations

Every single account on your balance sheet should be reconciled every month, not just your bank and credit card accounts. This includes a thorough review of your accounts receivable, inventory, accounts payable, payroll liabilities, inter-company loans, and more. You need to be able to explain to a banker or investor what each account represents and even be able to provide documentation, upon their request, to validate the balance reflected on your balance sheet. Too many businesses pay little or no heed to their balance sheet, but investors and bankers know it drives the accuracy of everything you present in your financial statements.

Lack of Metric and Ratio Knowledge

You need to know your numbers, and, even more importantly, you need to know what they mean in the context of your past, future, and industry as well as the perspective of bankers and investors. Bankers care about current ratio, days sales outstanding, working capital days, inventory turnover, fixed charge coverage ratio, and other proofs of your liquidity, stability, sustainability, and wherewithal to pay them back. Investors care about EBITDA, free cash flow, burn rate, and other things dealing with the cash required to grow the business and the potential return their investment may garner.

Your Debt Utilization Raises Red Flags

Lenders will pay close attention to the credit currently available to your small business. If you’re using too much, it could mean you are already stretched thin and might not be able to handle your repayments consistently.

On the flip side, if you haven’t utilized credit in the past, you could be considered a risk because you won’t have a debt track record from which they can base their decision. If you have a healthy amount of credit available and are only using a moderate amount, that puts you in the safety zone. It shows you have responsibly borrowed money in the past and know how to handle the repayments.

You Don't Have Any Income

Unlike an equity investor who will reap the rewards of their investment when a business is either sold or goes public, the first loan payment will likely be due somewhere around 30 days after a business owner receives the proceeds. In other words, if there isn’t sufficient income to make the loan payments, it’s unlikely the lender will approve the loan.

Your Loan Isn't Cost-Effective for the Lender

Don’t forget that it costs money to lend money. So if you apply for a small loan from a larger lender, they might see it as more effort than it’s worth. There are plenty of financing options for small dollar amounts, but you need to make sure you’re approaching the right lenders.

The Best Way to Begin Your Loan Search

Many of the mistakes listed above involve carelessness on the borrower’s part. They didn’t research the lender well enough or they didn’t carefully prepare their application. So pump the brakes a bit and take the time to understand your financial needs and identify the exact amount of money you’ll need to borrow.

According to the SBA, the median small business loan in America is $140,000. And the majority of loans are for less than $250,000. These numbers don’t necessarily mean you should follow the trend and ask for $140,000, but it provides a helpful baseline as you decide on the best amount for your needs. Use our SBA loan calculator to estimate your monthly payment and how large of a loan you can afford.

Another crucial factor is when the funds will be in your account. If you need the money right away, you’ll need to look at a small selection of expedited loans. If you have a more generous timeline, you can probably seek out slower options such as SBA loans (which can take up to 3 months to fund).

How to Recover from a Rejected Loan Application

First of all, don’t get discouraged. Only about 1 in 10 applications for small business loans are approved. It’s incredible (in a bad way) that 9 out of 10 business loan applications are rejected.

Having your loan application rejected is a wake-up call that your credit or business health isn’t as strong as you thought (or hoped) it was. It can be a very demoralizing experience—especially if you were counting on that financing to sustain your business operations.

When a loan application is denied, it can usually be traced back to two explanations: bad credit or a high debt-to-income ratio. Fortunately, both of those things can be fixed with responsible practices and a little patience, making you more likely to get a “yes” the next time. Here are 6 things to do as soon as your loan application is denied.

1. Study your rejection letter

All lenders are required by law to send you a written notice confirming whether your application was accepted or rejected, as well as the reasons why you were turned down for the loan. According to the FTC:

“The creditor must tell you the specific reason for the rejection or that you are entitled to learn the reason if you ask within 60 days. An acceptable reason might be: ‘your income was too low’ or ‘you haven’t been employed long enough.’ An unacceptable reason might be ‘you didn’t meet our minimum standards.’ That information isn’t specific enough.”

Understanding the “why” of your rejection helps you know where to focus your efforts, whether that means paying down your existing debt or building more credit history. So, instead of balling up the letter and tossing it into the trash, turn your rejection letter into your new plan of action so that you can be more credit-worthy down the road.

2. Address any blind spots on your credit report

Ideally, you should check your credit report three times a year, looking for old accounts that should be closed or inaccuracies which could suggest identity theft. But with so much on your plate as a business owner, keeping up with your credit can sometimes fall by the wayside.

That becomes a real problem when your loan is rejected for reasons that take you by surprise. Credit reports don’t just summarize your active credit accounts and payment history; they also collect public record information like bankruptcy filings, foreclosures, tax liens, and financial judgments. If any of those things are misrepresented on your credit report, it can be tremendously damaging to your chances of securing credit.

Whether inaccuracies occur due to malicious act or accident, it’s ultimately up to you to stay on top of your own credit. Access your credit report for free on AnnualCreditReport.com, and file a dispute with the relevant credit bureau (either Experian, Equifax and TransUnion) if you see anything shady on the report they provide. As credit.com advises:

“If you see any accounts you don’t recognize or late payments you think were on time, highlight them. You’ll need to dispute each of those separately with the credit bureau who issued that report. Even if the same error appears on all three of your credit reports, you’ll need to file three separate disputes over the item.”

3. Pay down outstanding balances

One of the most common reasons for loan rejection is credit utilization—the ratio of your current credit balances to credit limits. This is slightly different than your debt-to-income ratio, which divides your monthly debt obligations by your monthly gross income. Both measurements reflect how much additional debt you can afford to take on, so the lower these ratios are, the better chance you have of being approved for a loan.

Being denied a loan due to your credit utilization or debt-to-income ratio means that lenders aren’t fully confident that you’ll be able to make your minimum payments. There’s nothing to do here except take your medicine: put your new financing plans on hold and focus on paying down your balances until your debt-to-income ratio is below 36.

4. Beware of desperate measures

If you applied for a loan to stave off financial hardship, being turned down can create panic that can lead to some very bad choices. Predatory lenders make their living on that kind of panic, and their risky, high-interest loans almost always leave you worse off than before.

Predatory lenders offer financing that is intentionally difficult to repay. Through their extremely high interest rates, unreasonable terms, and deceptive practices, these lenders force desperate borrowers into a “debt cycle,” in which borrowers are trapped in a loan due to ongoing late fees and penalties. Two of the most common predatory loans are:

Payday loans: These are short-term loans with interest rates typically starting at 390%. (No, that’s not a typo.) A borrower provides the lender with a post-dated check for the amount of the loan plus interest and fees, and the lender cashes the check on that date. If the borrower doesn’t have enough money to repay, additional fees and interest are added to the debt.

Title loans: The borrower provides the title to their vehicle in exchange for a cash loan for a fraction of what the vehicle is worth. If the borrower is unable to repay, the lender takes ownership of the vehicle and sells it.

Please don’t go this route. If your loan rejection has left you desperate for money, swallow your pride and try to borrow from friends and family instead.

5. For thin credit, start small

Being turned down for an “insufficient credit file” doesn’t mean you’re irresponsible—it simply means you don’t have a long enough history of credit maintenance and payments for a lender to make a confident decision about your creditworthiness.

While this situation is very rare for established business owners (who generally have years of credit card and vendor account payments under their belts), young entrepreneurs might not have a long enough credit history to secure the financing they need. If that’s the case, you’ll have to go through the motions for a while: Opening a couple of small credit accounts with easy-to-manage payments will prove to lenders that you have your finances under control.

The Consumer Financial Protection Bureau recommends two low-risk options to build up your credit file: Secured credit cards, in which you put down a cash deposit and the bank provides you with a credit line matching that amount, and credit builder loans, in which a financial institution deposits a small amount of money into a locked savings amount, and you make small payments until you come to the end of the loan term and receive the accumulated money.

6. Wait for the right moment

When you authorize a financial institution to check your credit for a loan application, it typically creates a “hard inquiry” (or “hard pull”) that stays on your credit report for two years. This is different from a “soft inquiry,” which is more commonly used in background checks and pre-qualification decisions, and has no impact on your credit. (Some alternative lenders only use soft inquiries during your application and funding process, so it’s important to find out up front if your lender will be performing a hard credit pull, a soft pull, or both.)

Each hard inquiry won’t affect your credit score much on its own, but multiple hard inquiries in a short period of time can be a major red flag for lenders, who may interpret those inquiries as a sign of financial instability or desperation.

When you’re turned down for a loan, your first instinct might be to immediately apply for a loan elsewhere, in order to get a “second opinion.” The problem is, you may be even less likely to be approved for that next application because you’re racking up hard inquiries on your credit report.

Our advice? Don’t apply for another loan until you’ve made significant improvements to your credit and financial health—a process that can take a year or more. The longer you can wait, the better.

Where to Go When the Bank Says No to a Small Business Loan

After you’ve improved your credit and financial health, you’ll be ready to look for financing options again. When looking for a small business loan, whether for expansion, short-term expenses, or any other, you have more options than just checking with your local bank. Banks and other conventional loan providers have certain criteria when approving your loan. They take into consideration many factors such as the time for which you have been in operation, credit scores, the monthly revenue you earn, your business plan, and the collateral you can provide, among others. If you’re unable to meet their conditions, they may not offer you the finance you need. In such a situation, your best bet is to look to alternative or innovative lending institutions such as Lendio to obtain the funds. Here are some of the best options out there.

SBA or Small Business Administration Loan Programs

The SBA has several small business loan programs for small enterprises, intended to meet their finance requirements. While the government does not lend directly to the companies, it works with microloan providers, banks, and other community development institutions. It supports entrepreneurs by laying down certain regulations for the lending procedures.

  • SBA 7(a) Loan Program: A very versatile program, it allows start-ups and small businesses to use these funds for buying machinery, tools, furniture, and other equipment, working finances, buying and renovating fixed assets like structures and other property, among others.
  • Real Estate and Equipment Loans: You can use the financing provided under this program only for expansion purposes and to buy land, existing structures, developing, renovating, and constructing buildings, and machinery for use on a long-term basis.
  • Microloan Program: By way of this program, small business owners cannot buy fixed assets or pay off loans. They can only use the funds as working capital or to purchase small machinery, tools, and other fixtures. You can also buy inventory, furniture, and other supplies you need.
  • Disaster Loans: If you’ve lost property and real estate, inventory, machinery, equipment, or any other supplies in a declared disaster, you can use the business loans provided under this program to replace them. This program offers finance at low interest rates.
Alternative Finance Sources

Aside from banks and the SBA, there are many other sources for getting the funding you need. Look around for the many lending institutions that offer you a small business loan without the strict criteria that banks have. They may be open to providing you business loans despite low credit scores, lack of collateral, or insufficient monthly revenues. However, you might have to pay much higher rates of interest and typically, small business loan terms are shorter than those offered by the SBA. Here are some of them:

  • Lending Club: You can borrow funds of up to $35,000 from the other members if you have a credit score of a minimum of 650. Other members lend you the finance you need and can earn up to 9% in interest.
  • Prosper: The maximum loan amount offered is $25,000 and borrowers with credit scores of a minimum of 640 can access funds. Lenders can provide loans in smaller denominations until the total amount is raised.
  • OnDeck Capital: You can access funds from this source if you can prove that you have been in business for a minimum period of a year and have an annual revenue of $100,000. Apply for the business credit you need over the phone or by filling an application form online. OnDeck makes the loan amount available to you within a day or more.
  • Communities At Work Fund: if you can meet their criteria and run a non-profit undertaking, this finance institution extends the funding you need. They direct their support to businesses with low-income and communities in the lower wealth category.
  • Accion: Depending on certain conditions, you can get financing of a maximum of $50,000 if you have a credit score of at least 525. At the same time, you must prove that in the last one year, you have not declared bankruptcy and have enough monthly earnings to clear your bills and make payments towards your loan.
Crowdfunding Loans

Crowdfunding loans are similar to microloans, and small business owners that cannot access bank finance can make use of them. However, like microloans, you won’t need to pay back the loan amount in cash. Instead, you’ll need to honor the loan obligation in other ways.

  • Kickstarter: This institution issues loan products to companies or creative entrepreneurs for expansion purposes. While you’ll remain the owner of the products you create, you’ll need to prove that your enterprise has the total funding to get started. In lieu of the loan amount, you’ll pay in the form of a product or service your company offers. For instance, if you’re planning to open an art academy, you might have to submit saleable art to pay for the loan.
  • Indiegogo: The terms and conditions for accessing this funding are similar to that of Kickstarter. However, you don’t need to have the complete start-up finance in hand to qualify for the business credit.

Entrepreneurs and owners of startup companies no longer need to rely on banks to get the business loans they need. Nor do they need to wait for long processing times and submit elaborate paperwork to get approved. Instead, they can contact many other lending institutions and get the small business loan products they need at terms and conditions that are more suitable for their enterprise and its unique needs.

Lendio is a free marketplace for small business loans. Simply answer a few questions about your business and the amount of capital you are seeking. Lendio will instantly match you with loan options from our network of over 50 lenders. Lendio makes it possible to shop for the best business loan options and rates available without having to submit your information to multiple banks and organizations.

With all of these strategies, it’s helpful to put yourself in the lender’s shoes. Their job is to simultaneously fund small businesses and also safeguard their money. It’s a difficult balancing act, and they likely take no pleasure in rejecting applications. You can make things easier for both them and you by carefully preparing each application and ensuring that you’re giving them ample reasons to give you the green light.

If your loan is approved, throw a little party with your friends. If your application is denied, don’t despair. Remember, the majority of loans are met with a hard no. Take positives from the experience by learning from your mistakes and submitting an even stronger application the next time around. This approach ensures you’ll always be progressing and you’ll eventually get the financing your business requires.

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