Expert Interview with Chinwe Onyeagoro on Small Business Financing

As co-founder and CEO of FundWell, Chinwe Onyeagoro helps small businesses find the financing they need to get started or grow faster. As a result, she's an expert on getting your business up and funded, and shared some insights with us about the funding process.

What are some common challenges you see many small businesses face when it comes to capital?

The top three challenges that we see small businesses face when it comes to applying for loans are:

Knocking on the wrong door - Entrepreneurs apply for loans before determining whether they meet the basic lender eligibility criteria (e.g., credit score, cash flow, collateral) and they get rejected seven out of 10 times. Entrepreneurs should always do their homework about a target lender before investing time and energy in completing a loan application. Resources like FundWell can help business owners figure out which lenders to approach within minutes.

Not profitable - They don't show positive net income in their business tax returns, which signals to prospective lenders that they don't have any additional money to cover the interest and principal payments required for a new loan. It is critical that you show profitability in the last calendar year. Whether you have to ramp up your sales or reduce expenses, showing even $10,000 of net income puts you in a strong position to be eligible for a loan of as much as $50,000 (assuming a 6% interest rate and 10-year term).

Documents not ready - They don't have their financial statements prepared for lenders to underwrite the loan request. Focus on getting your paperwork together before you begin the loan application. You'll get the loan approval decision faster if you do. The lender cannot submit your loan request to the underwriter until they have all of your personal and business financial information in hand.

When opening a business, what's the first thing the owner should do, in terms of finances?

When opening a business, the first thing an owner should do is create a business bank account. Before you begin spending on logos, business cards, office/retail space, employees and inventory, you need to have the right system in place to facilitate and record all of your financial activities. Completing these transactions out of your personal bank account is a no-no. Lenders do not like to see entrepreneurs mixing their business and personal financials. It is a red flag! When you keep the two accounts separate, it really pays for three important reasons.

First, it makes life easier for your accountant to do bookkeeping and prepare financial statements that reconcile to your business bank statements.

Second, it gives you a clear sense of the cash you have available to spend on the business.

Lastly, it makes it easier for you to convince a lender that you are running a real business in order to secure a business loan.

Where does insurance fit in for small businesses? Will not being covered make securing financing harder?

There are three types of insurance that are really important for securing a loan. Lenders generally want to see the following three policies in place to protect the business's assets and the lender's collateral:

General Liability Insurance - In the event there are claims filed by third parties for injury or property damage.

Workman's Comp Insurance - In the event of employee injury while on the job to cover wage replacement and medical benefits to those employees.

Auto Insurance, if applicable - In the event there are claims filed by the business/employee or passenger or someone adversely affected by theft, fire, weather damage or an accident involving company-owned vehicles in order to pay for vehicle repair or replacement and/or for injured party medical benefits.

What are some changes in small business financing we should be watching?

The small business financing marketplace is changing rapidly. The most important trend for entrepreneurs to watch are the interest rates. New lenders have built very impressive, online automated loan applications that deliver approval decisions within minutes. However, what they don't tell you is that business borrowers pay handsomely for this accelerated approval process. Effective annual interest rates for online lenders start in the mid 20s and can get as high as 150%. For those businesses that could qualify for lower interest rates, rather than taking this quick, costly money, look elsewhere. And for those that can't, have an exit plan to refinance this high interest funding as soon as humanly possible (if not sooner). Every dollar of interest you pay to these lenders is a dollar of profit that is not reinvested in growing your business.

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