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.
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 smallbusiness applicants for loans or lines of credit at CommunityDevelopment Financial Institutions (CDFIs) were approved.
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.
HOW THEY WORK:
A region, population or group may face certain economic challenges.
The federal CDFI Fund, run by the Department of the Treasury, issues loans, grants, deposits or equity investments to local CDFIs.
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.
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.
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.
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.
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.
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.
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
Just 3 agencies issue scores: Experian, Equifax and TransUnion.
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.
300 to 850. All 3 agencies use the same scale.
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
Personal credit information, including history with creditors such as mortgage lenders, auto finance companies and credit cards.
Business credit information,including payment history with creditors such as trade finance providers, history of business credit cards and lines of credit.
All 3 reports will look similar, with minor variances.
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?
Pay all bills on time.
This is one of the most important factors when it comes to your credit score.
Maintain positive cash flow.
Review your scores periodically and update your business profile.
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.
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.
REASON FOR DECLINE Your payment history is unsatisfactory.
WHAT IT MEANS Your personal or business credit report shows a pattern of late or missed payments.
WHAT YOU CAN DO Always pay on time. It can take years for blemishes to fall off your report completely, but consistent, on-time payments will help.
REASON FOR DECLINE You have a lack of established revolving credit.
WHAT IT MEANS Your credit report doesn’t show a long history with credit cards or other creditors.
WHAT YOU CAN DO 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.
REASON FOR DECLINE You’re using too much of your credit.
WHAT IT MEANS Lenders dislike when you’re using all—or even most—of the credit that’s available to you.
WHAT YOU CAN DO If you can, keep your utilization ratio—the percentage of credit you’re using vs. total available credit—as low as you can.
REASON FOR DECLINE You’ve filed for bankruptcy.
WHAT IT MEANS A past personal or business bankruptcy may affect your chances of securing new credit.
WHAT YOU CAN DO 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.
REASON FOR DECLINE Your business has insufficient revenue.
WHAT IT MEANS The lender is concerned that your revenue can’t support increased credit.
WHAT YOU CAN DO Consider a smaller amount or a collateral-backed loan or credit line.
REASON FOR DECLINE Your business doesn’t qualify.
WHAT IT MEANS 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.
WHAT YOU CAN DO If your business hasn’t been around long enough, try again when it has. Or consider a CDFI loan, which may have different requirements.
REASON FOR DECLINE Your business has insufficient cash flow coverage.
WHAT IT MEANS The lender thinks you don’t have enough cash flow to make payments on new debt.
WHAT YOU CAN DO Consider a smaller amount or a collateral-backed loan or credit line.
YOUR BANKING RELATIONSHIP
REASON FOR DECLINE You have sufficient credit with your bank already.
WHAT IT MEANS Even if you have great qualifications, a bank may not want to exceed a certain amount of credit exposure.
WHAT YOU CAN DO If you have unused credit lines, close them. If not, you may need to consider other sources.
REASON FOR DECLINE It’s a duplicate application.
WHAT IT MEANS If you’ve applied for the same product within the last 90 days, it’s considered a single application.
WHAT YOU CAN DO Wait it out.
Getting turned down for business credit is frustrating, but knowing why it happened can help improve your chances next time.
If getting credit for your small business is proving to be an uphill climb, you may want to look into a secured credit card. Not only can it help you build or reestablish the credit you need now, but also possibly provide a stepping stone toward an unsecured credit card or bank loan in the future.
When it comes to your small business, better credit could mean bigger possibilities. Improving your company’s credit score — and in some cases, repairing it — could help you take full advantage of opportunities that may fuel your business growth.
Learn the ins and outs of building a solid foundation of good business credit with our new guide.
Now that you’ve gotten familiar with the loan choices the SBA offers with, you may be ready to apply. Here, we give you a step-by-step checklist of everything you need to do to complete and present the necessary paperwork and cover all your bases.
Need a loan? Consider one from the Small Business Administration. In our three-part series, you can explore all your SBA options to make a more informed decision and get the loan that fits your business needs best.
There are several types of loans available from the Small Business Administration. In part 2 of our 3 part series, discover all the loan choices at your fingertips, so you can do your due diligence and select the one that’s perfect for your business. You can also read Part 1: "An Overview of SBA Loans" by clicking here.
When it comes time to secure financing for your small business, it’s important to know going in what lenders are looking for. And while it’s true that many lenders have their own unique underwriting requirements, most follow “The 5 Cs.”
Better credit means bigger possibilities. Improving your company’s credit score can help you take full advantage of the opportunities that arise as your business grows. Learn the ins and outs of building a solid foundation of good credit history with our infographic, Building Credit for Your Small Business.
Give your business some credit. When it comes to credit cards, the right choice can make a big difference, and can play a very important part of the successful growth of any small business. Understanding the different features, benefits and trade-offs of all the options available is key. Our new infographic will help you get started.
More and more banks are loosening up and lending again. And as a small business owner, you are constantly under pressure to make sure your business has the financial backing it needs. This new guide will provide a refresher of the most traditional and creative financing options available.
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Start a discussion in our member-to-member forums. By participating in the Small Business Community, our members gain knowledge and connections that give them a competitive advantage in building a successful business. Take advantage of the collective experience and expertise of the community to get small business ideas and help with a specific question or business challenge.
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