There’s still turbulence ahead for small businesses as we move into the latter part of 2020 but those businesses that do survive the next year may emerge even stronger as competition decreases. Whether it’s the opportunity to buy a failing competitor or the chance to expand your business as customer demand returns, you’ll want to be ready for what may be ahead. Being able to access capital when you need it can give you the flexibility you need to respond to this rapidly changing environment.
Usually when a business needs financing, it needs it yesterday. So here are three simple steps you can take right now to help your business be “lender ready.”
1. Make Sure Your Books Are Up to Date
The recent extension for filing 2019 tax returns turned out to be more of a curse than a blessing for some small business owners. That’s because they put off completing their bookkeeping and tax returns, but then discovered they needed that information to apply for COVID-19 relief loans like the Paycheck Protection Program (PPP) or Economic Injury Disaster Loans.
It’s common for lenders to scrutinize business revenues and/or financial statements before making small business loans. When applying for a small business loan now or in the future you may be asked to:
- Provide business bank account statements for the past 3-6 months
- Link your business bank account so the lender can analyze revenues
- Supply tax returns for the prior 2-3 years along with up-to-date financial statements
Up-to-date bookkeeping and financial statements will make it much easier to apply for financing — including top-tier financing through traditional financial institutions such as banks or credit unions.
It should also be noted that a separate business bank account is essential. Without one, it will be much more difficult for a lender to verify current revenues.
2. Check Your Personal and Business Credit Reports
According to research by the Federal Reserve in the 2019 Small Business Credit Survey, just over half of all small business owners with 1-499 employees reported using either business credit or a combination of business and personal credit to get financing. Having strong business and personal credit can make it easier to qualify for some types of financing and may increase your funding options.
AnnualCreditReport.com — the government mandated site for free personal credit monitoring — is offering weekly credit report updates. That site doesn’t offer free credit scores though, so you may want to use one or more of the 138 places where you can check and monitor your credit scores for free.
Ideally you’ll want to keep tabs on your credit from the three major consumer credit reporting agencies (Equifax, Experian and TransUnion) and the three major commercial credit bureaus (Dun & Bradstreet, Equifax and Experian). These agencies generally don’t share information with each other, and you may find different information on each report.
There’s another reason to check and monitor your business credit: Krebs on Security is reporting an alarming increase in business identity theft and even businesses who are not in the market for financing are at risk.
3. Verify Your Industry Code
The North American Industrial Classification System (NAICS) is the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting and analyzing business data. It’s a six-digit code that describes the industry in which the business operates. Window cleaning businesses generally fall under NAICS Code 561720.
Lenders may also use these codes to target certain businesses for financing so you want to make sure yours is correct. Your business credit reports may list your NAICS code, so check there first. Note that if your business provides additional services you may find the code identifying your business is different; either way make sure to look it up at NAICS.com to ensure it correctly describes your industry.
Hopefully economic recovery will come soon. In the meantime, doing what you can to prepare for it may give your business the edge it needs to come out ahead.
About the Author:
Gerri’s been guiding individuals through the confusing world of finance and credit for 20+ years. She is the author or coauthor of five books, including her most recent, Finance Your Own Business: Get on the Financing Fast Track.Today, Gerri serves as the Education Director for Nav, an online platform that matches small business owners to their best financing options and gives free access to personal and business credit scores.