One of the most common questions asked by business owners is, "How long before my business can get funding?" The answer varies depending on the type of funding you're seeking.
In this video, I discuss this burning question in more detail
Here's a breakdown of the primary funding options and their requirements:
Traditional Bank Loans
Traditional banks such as Chase, Wells Fargo, and Bank of America typically require your business to be operational for at least two years before considering you for a loan. These banks look for established businesses with a solid track record and financial stability.
Credit Card Processing Funding
Companies like Stripe and Square offer funding based on your payment processing history with them. To qualify, your business needs to process payments with these platforms for at least six months. A significant advantage of this type of funding is that it does not involve personal credit checks. Additionally, Stripe reports to the Small Business Financial Exchange, helping you build business credit.
Merchant Cash Advance (MCA) Loans
Merchant Cash Advance loans usually require your business to be operational for at least one year. These loans involve daily or weekly payments and are often considered predatory due to high-interest rates and aggressive repayment terms. It's generally advisable to avoid MCA loans, especially if you are a single-member LLC, as they can put your personal assets at risk.
CDFI Lenders
Community Development Financial Institutions (CDFIs) are non-profit lenders that often require your business to be operational for six months to one year. However, being in business for two years can make you eligible for higher loan amounts. These lenders are more credit-friendly, typically requiring a minimum credit score of 570. Keep in mind that while CDFIs may accept lower credit scores, they will require additional documentation and are wary of liens or judgments against your business.
Understanding Loan Positioning
In lending, terms like "1st position" and "2nd position" refer to the order in which lenders have the right to collect on a debt if you default. Banks prefer to be in the 1st position, meaning they are first in line to collect. If you take another loan, the new lender would be in the 2nd position. This hierarchy is why banks are hesitant to lend to businesses with existing liens, as they don't want to be second in line for debt collection.
Conclusion
Securing funding for your business depends on the type of financing you pursue and your business's operational history. Traditional banks require longer business histories, while alternative funding sources like Stripe, Square, and CDFIs may offer more flexibility. Understanding the specific requirements and implications of each funding type can help you make informed decisions and better prepare your business for securing the necessary funds.
By knowing the timelines and prerequisites for each funding option, you can strategically position your business to meet these requirements, thereby increasing your chances of obtaining the financial support you need to grow and succeed.
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