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2018
SBC Team

Need Capital? Consider a CDFI

Posted by SBC Team Apr 20, 2018

If you’re a small business owner looking for capital, you may want to consider looking into Community Development Financial Institutions, or CDFIs—organizations that specialize in lending to small businesses. While approval rates are higher than at traditional banks, there are pros and cons. Check out our infographic to learn more about whether a CDFI fund might be right for your business.

 

Bank of America Business Advantage

NEED CAPITAL?
CONSIDER A CDFI

It can be tough for a small business to get access to credit—but it can be easier if you know where to look. According to the Federal Reserve Small Business Credit Survey, in 2016, 77% of small business applicants for loans or lines of credit at Community Development Financial Institutions (CDFIs) were approved.

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SO WHAT IS A CDFI AND COULD ONE HELP YOUR SMALL BUSINESS?

CDFIs are lenders that help certain small business owners gain access to capital.

Banks, credit unions, loan funds, microlenders or venture capitalists may serve as CDFIs.

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HOW THEY WORK:

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A region, population or group may face certain economic challenges.

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The federal CDFI Fund, run by the Department of the Treasury, issues loans, grants, deposits or equity investments to local CDFIs.

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Banks also help fund those local CDFIs, helping them to provide financial assistance and mentoring. Bank of America sends millions of dollars each year to different CDFIs.

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The businesses grow in their communities, helping revitalize them.

BORROWING THROUGH A CDFI IS DIFFERENT THAN SECURING A BANK LOAN OR LINE OF CREDIT. CDFIs OFFER CERTAIN PROS AND CONS.

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PROS

Approval rates of 77% at CDFIs, vs. 67% at small banks and 54% at large banks.1

Rates are often competitive with other common funding sources.

Many are geared toward working with start-up and early-stage companies.

Like Bank of America customers, borrowers have access to business education and support, such as help with business plans.

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CONS

Not every business is eligible; borrowers may need to reside in a certain area or be part of a specific population (e.g., women- or minority-owned).

There may be caps on loan amounts.

Funding time may be slower than traditional lenders.

INTERESTED?

Figure out if there's a CDFI that could work for you by checking the U.S. Treasury's tool, or try the Bank of America CDFI locator.

Remember: If you decide to apply for CDFI financing, be prepared—they may operate differently than your bank and ask for other information.

 

Click here to download a PDF version of this infographic.

A good business credit score may help your business qualify for better rates on credit cards, loans and lines of credit. So how do you find out what your business credit score is and see what’s on your business credit report? Plus, how do you improve your score if it’s not where you’d like it to be? Check out our infographic.

 

Bank of America Business Advantage

WHAT’S A BUSINESS CREDIT SCORE?

You’re probably familiar with your personal credit score—but did you know your business may have one, too? It also may have its own credit report. A good business credit score and report may help your business qualify for better rates on credit cards, loans and lines of credit.

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Even someone who knows their way around a personal credit score and report may be surprised when it comes to their business.

Here are some of the key differences between personal and business credit.

WHO ISSUES THE SCORE

PERSONAL CREDIT

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Just 3 agencies issue scores: Experian, Equifax and TransUnion.

BUSINESS CREDIT

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Scores come from a variety of vendors who collect data about your business and create reports. Three of the largest are Experian, Dun & Bradstreet and LexisNexis.

THE NUMBER

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300 to 850. All 3 agencies use the same scale.

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Variable, depending on the issuer. For example, Dun & Bradstreet PAYDEX scores range from 1 to 100; LexisNexis scores fall between 222 and 900.

WHAT'S IN THE REPORT

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Personal credit information, including history with creditors such as mortgage lenders, auto finance companies and credit cards.

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Business credit information,including payment history with creditors such as trade finance providers, history of business credit cards and lines of credit.

STANDARDIZATION

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All 3 reports will look similar, with minor variances.

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There’s no standardization, so a report from one vendor may include information about a certain vendor or creditor that another does not.

While your personal and business scores are different, your personal score can affect your business score. So keep an eye on it.

WANT TO IMPROVE YOUR BUSINESS SCORE?

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Pay all bills on time.

This is one of the most important factors when it comes to your credit score.

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Maintain positive cash flow.

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Reduce debt.

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Review your scores periodically and update your business profile.

This includes reporting business income.

To find out more, please visit a financial center or speak with your banker.

 

 

 

Click here to download a PDF version of this infographic.

Getting denied for business credit is frustrating, but knowing why you were turned down can help improve your chances next time. From your cash flow to your utilization ratio, this infographic breaks down the common reasons small businesses are turned down and explains steps to take before reapplying.

 

Bank of America Business Advantage

BUSINESS CREDIT:
IF YOU GET DECLINED

When a bank considers your application for business credit, they take a close look at your history with creditors and billers—as well as reviewing your company’s financials. These are some of the reasons applications are declined.

YOUR CREDIT

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Your payment history is unsatisfactory.

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Your personal or business credit report shows a pattern of late or missed payments.

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Always pay on time. It can take years for blemishes to fall off your report completely, but consistent, on-time payments will help.

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REASON FOR DECLINE 02-mini-icon-x.png
You have a lack of established revolving credit.

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Your credit report doesn’t show a long history with credit cards or other creditors.

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Time is one of the most important factors in your credit history. The longer you can show a pattern of on-time payments, the better. Applying for a secured credit card is one way to build your history.

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You’re using too much of your credit.

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Lenders dislike when you’re using all—or even most—of the credit that’s available to you.

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If you can, keep your utilization ratio—the percentage of credit you’re using vs. total available credit—as low as you can.

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REASON FOR DECLINE 02-mini-icon-x.png
You’ve filed for bankruptcy.

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A past personal or business bankruptcy may affect your chances of securing new credit.

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In the coming months and years, work to improve cash flow, boost revenue, cut expenses and improve your credit score. You can also look into a Community Development Financial Institution (CDFI) loan, which may have different requirements.

YOUR BUSINESS

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Your business has insufficient revenue.

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The lender is concerned that your revenue can’t support increased credit.

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Consider a smaller amount or a collateral-backed loan or credit line.

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REASON FOR DECLINE 02-mini-icon-x.png
Your business doesn’t qualify.

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Not every service or business is eligible. For instance, to qualify for certain credit products, Bank of America requires your business to be under current ownership for at least two years. And some products have minimum revenue requirements.

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If your business hasn’t been around long enough, try again when it has. Or consider a CDFI loan, which may have different requirements.

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Your business has insufficient cash flow coverage.

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The lender thinks you don’t have enough cash flow to make payments on new debt.

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Consider a smaller amount or a collateral-backed loan or credit line.

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YOUR BANKING RELATIONSHIP

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You have sufficient credit with your bank already.

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Even if you have great qualifications, a bank may not want to exceed a certain amount of credit exposure.

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If you have unused credit lines, close them. If not, you may need to consider other sources.

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ADMINISTRATIVE REASONS

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REASON FOR DECLINE 02-mini-icon-x.png
It’s a duplicate application.

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If you’ve applied for the same product within the last 90 days, it’s considered a single application.

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Wait it out.

Getting turned down for business credit is frustrating, but knowing why it happened can help improve your chances next time.

To discuss your needs and find the solutions that work best for your business, please contact a small business banker.

 

 

 

Click here to download a PDF version of this infographic.

Starting a business can be difficult. The reality facing all business owners is that a market of individuals must like and, ultimately, support your product or service through their patronage.

 

Let’s face it – to start, you need logos, websites, office space and office supplies. Eventually, you will need to buy inventory, hire employees and advertise to win customers. This all requires money!

An overwhelming majority of small businesses fail and one of the biggest reasons is a lack of capital. There are three major ways to bring capital or money into your business:

 

  1. Investment capital
  2. Bank or business loans
  3. Sales and company revenue

 

Investment Capital

ABC’s Shark Tank features entrepreneurs from across the country pitching five very successful entrepreneurs (The Sharks) for the hope of winning an investment. The Sharks are essentially venture or angel capital investors because they invest their own money and provide expertise in exchange for equity in the entrepreneur’s business.36333069_s.jpg


One of the disadvantages of relying on outside  funding is you need to convince someone to invest their personal assets into your business. The process often requires you to know someone or have an existing relationship with a private investor. Secondly, investor capital is most expensive, often requiring to give up some portion of your ownership rights in the business.

 

Bank or Business Loans

Bank and business loans can be a great way to capitalize and grow your business. For example, you may need to hire an employee but your current cash flow may be tight because you are waiting to be paid by a customer. In that case, a bank loan or line of credit could be very useful for meeting your company’s payroll. 

For example, one of the advantages of a business term loan is that you can pay for a new piece of equipment over a longer time period generally at a fixed rate of interest for the duration of the term of the loan. On the other hand, a line of credit can be useful if you are looking to meet increased temporary working capital needs that are seasonal in nature and your business will be able to pay it back in a short period of time. The line of credit allows you to borrow the amount you need and pay it back when your business cash flow improves, however, the outstanding borrowed amount incurs interest cost that is generally a variable rate of interest.

 

Additionally, it’s in the best interest of your bank or lender to work with you to solve your cash-flow challenges. Your business and banking relationship can be strengthened by working closely with a banking professional.

 

Sales and Revenue

Sales and revenue are the most important areas of focus for your business. Self-sufficiency in your business should be the goal and sales/revenue can help you grow to self-sufficiency quickly. The first two ways to bring money into your business (investment capital and bank or business loans) support the goal of growing your revenues.

 

These three important ways to bring money into your business should be used in conjunction with your business needs. Learn more about how to raise capital for your business.

 

Related Content:

 

  1. Credit and Lending Resource Center
  2. Get answers and information about business financing
  3. Find the right financing for your business
  4. What is working capital – and why is it important?

 

About Ebong EkaEbong+Eka+Headshot.png

Ebong Eka is no stranger to the world of personal finance. As a certified public accountant and former professional basketball player he offers a fresh perspective to small business planning and executing. With over fifteen years of accounting, tax & small business experience with firms like PricewaterhouseCoopers, Deloitte & Touche and CohnReznick, Ebong provides practical money solutions tailored to the everyday person, the aspiring entrepreneur or the small business owner.

 

Ebong is the founder of EKAnomics, a sales, pricing and leadership firm. He is also the founder of Ericorp Consulting, Inc., a tax and management consulting firm. Ebong is the author of “Start Me Up! The-No-Business-Plan, Business Plan.

 

Ebong is also the founder of The $250 Tax Pro, which provides tax preparation and consulting services in the Washington, DC area.

 

Web: www.ebongeka.com or Twitter: @EbongEka.

You can read more articles from Ebong Eka by clicking here

 

Bank of America, N.A. engages with Ebong Eka to provide informational materials for your discussion or review purposes only. Ebong Eka is a registered trademark, used pursuant to license. The third parties within articles are used under license from Ebong Eka. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

 

Bank of America, N.A. Member FDIC.  ©2017 Bank of America Corporation

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