Working Capital

Top 5 Tips to Improve Eligibility for Working Capital Financing

June 29, 2022
The C2FO Team
Working Capital Financing

Working capital financing is inevitable for most growing businesses. How can you increase your chance of approval or leverage nontraditional solutions?

As inflation rates spike, you might be considering working capital financing for your small or mid-sized business. Working capital covers everyday expenses and provides a buffer for emergencies — but it’s also crucial if your business is seeking new growth opportunities or investments. 

Working capital financing will also help you stay prepared for unexpected costs, especially in the current economic climate. Even if you already have a reliable cash flow, you’ll likely need financing to expand and sustain your business.

Financing will also benefit you if you have inconsistent cash flow. This could be because your business is still getting established or because you’re in a seasonal industry where fluctuating revenue is expected.

There are several traditional financing options for securing working capital, such as business loans, lines of credit, overdraft protection and business credit cards. There are also a variety of nontraditional financing types, including:

Working capital is crucial for growing your business, but financing can be hard to secure. Here are five tips to ensure that your business is eligible for the working capital financing you need to grow.

working capital financing credit score

1. Review your credit score

Before applying for financing, access your credit report from a consumer reporting company like Equifax. Credit scores of at least 700 are usually required to qualify for bank loans and give you the best terms and interest rates. 

As a first step, lenders will review your credit report to assess your risk as a borrower and determine your loan’s interest rate. They will review your credit history, your ability to pay down debt and your track record with other lenders. They’ll also take note of any red flags, like bankruptcies and liens.

If you have a lower credit score, review your report for potential errors and challenge them. You can also improve your financing eligibility by minimizing any outstanding debts, paying your bills on time and working toward higher credit limits.

If you can, incorporate or establish your business as a limited liability company (LLC) as early as possible. These have their own credit histories so that you don’t have to rely on your personal credit for financing. 

Take the time to build a more active and healthy credit history. This step is worthwhile to improve your financing eligibility, especially if your credit score is low or you don’t have much credit history.

2. Establish a consistent cash flow

Lenders also want to know that you’re generating enough revenue to pay back a loan. Beyond your credit score, cash flow is a primary factor that lenders use to determine your eligibility.

You can get a better sense of your eligibility by calculating your quarterly cash flow. This shows you what kind of loan payment you can realistically afford before you apply for financing that is unlikely to be approved. Determining your cash ratio is also valuable. This metric calculates your on-hand liquidity, which banks often use to assess eligibility.

If your cash flow isn’t sufficient, you might need to generate more consistent revenue before applying. Most lenders require borrowers to have been in operation for at least a couple of years.

You can also use early payment programs to establish a steady cash flow. Programs like the one offered by C2FO give your customers discounts for early payments, which increases your working capital, establishes a more stable revenue stream and improves your financing eligibility. They also have the benefit of being more convenient and cost-effective than other lending options, like bank loans.

working capital financing business plan

3. Create a comprehensive business plan

Lenders need to understand your business’s road map and how you plan to use financing. Build a comprehensive business plan to show lenders that you are serious about the venture and have a solid plan for repaying the loan. It also gives you the opportunity to tell lenders your business’s story and convince them that the venture is worth investing in.

Draft a business plan that includes:

  • An overview of your company, products and services, how the business is structured, and relevant marketing and sales plans
  • Market analysis and other industry information
  • Financial information and projections
  • Spending and repayment plans for approved funding

Take time to do the math and make realistic estimates for your business costs. Review the document with a business plan expert to get feedback and ensure there are no information gaps that might discourage lenders.

4. Prepare your documents

Coming prepared with all the necessary documentation will give lenders more confidence in your application. Beyond your business plan, this includes personal and business financial statements, other financial records like income tax returns, your loan application history and legal documents like business licenses.

Loan application checklists, like this one from the U.S. Small Business Administration, will help you cover all your bases. To improve your financing eligibility, hire a certified public accountant to review your financial and accounting records for accuracy, completeness and clarity.

As part of your documentation due diligence, you should consider setting up your business as an LLC or S corporation if you haven’t already. These corporate structures protect your personal assets and appear more credible as long-term ventures to lenders.

You should also audit any publicly available information about your business online — like websites, customer feedback and social media pages — for potential concerns. You won’t be presenting this information to lenders, but they might review your online presence as part of the approval process.

5. Apply for financing strategically

Financing applications are recorded on your credit report, and applying for loans indiscriminately can hurt your eligibility. This is why it’s important to apply for financing strategically, researching your options for a solution that fits your needs. It’s also an opportunity to educate yourself on financing terminology, types and processes.

Hire a financial advisor to help you explore a variety of traditional and alternative financing options. These experts are also valuable for determining your eligibility based on factors you might have overlooked — like how lenders approach your particular industry.

Soliciting expert advice, building healthy credit and using tools to establish reliable cash flow will all help boost your eligibility and support business growth.

Doing your research and seeking professional support communicates to lenders that you’re serious about your business, which can position your application more favorably. You might even find that a nontraditional financing option is better suited to your business.

Whether you’re starting or growing a business, you’ll probably need working capital financing to support day-to-day operations and other expenses. Securing working capital financing can be difficult, especially if you lack a credit history, have a low credit score or struggle to maintain cash flow.

However, soliciting expert advice, building healthy credit and using tools to establish reliable cash flow will all help boost your eligibility and support business growth.

If you need working capital now, you might not have the time or resources to build a higher credit score and meet other eligibility requirements for business loans. If you’re considering nontraditional financing, learn more about C2FO’s Capital Finance solutions or find out if your customers offer early payment discounts.

Want to take control of your cash flow?

Early payment through C2FO can help.

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