As a small business owner, there’s a good chance you’ll need to secure funding at some point to reach your goals. The need for funding can be pressing from the startup phase and all the way through the life of your business. 

One out of four businesses cites lack of funding as an obstacle to growing their business according to the U.S. Small Business Administration. Meanwhile, 46% of small businesses rely on personal credit cards for business expenses. 

Building a fundable business is critical to help your company avoid these potential pitfalls. And understanding what fundability is and how it works is the first step towards achieving that goal.

What Is Fundability and How Does It Work?

Fundability, at its core, is a business’s ability to access the funds it needs to launch, grow, or thrive. A fundable business will have an easier time securing financing and attracting investors — both of which can be critical to a company’s long-term success. 

So, what is it that makes a business fundable? There are many moving parts in the fundability equation. The key idea is that you need to make sure that others (banks, lenders, private investment sources, and more) consider your business to be credible and a good investment. 

Fundability comes down to risk and reward. If there’s a good probability that an investor or lender will make money by doing business with you, you’re more likely to succeed in your quest for business funding. 

Of course, the opposite may be true as well. If a lender or investor deems that the risk of losing money is too high, you may have a harder time securing capital for your business.

How to Build a Fundable Business

Building a fundable company requires you to look at your business the way a lender or potential investor might see it. What steps can you take to make your business more credible so that others might feel comfortable working with you?

Below are six actions to consider taking if you want to establish a fundable foundation for your business. 

1. Establish a Business Identity

Many parts of your business are intertwined with your personal life when you’re a small business owner. Yet despite this close connection, it’s essential to give your business its own identity.  

Setting up separate contact information for your business is step one, including:

• Business Name 
• Phone Number
• Address

It’s important to point out that you can accomplish the goals above while still working out of your home if that’s your goal. A virtual office, for example, gives you the ability to establish a separate business address for your company that isn’t a PO Box. 

On top of setting up separate business contact information, you will want to make sure you secure any required business licenses and permits. It’s also important to have a professional website and a business email address that matches your company URL. 

Choose Your Business Entity

Another essential step in building a fundable business is choosing the right business entity. If you want a company that can attract investors and qualify for financing, your best bet will probably be one of the following options: 

• C Corporation (C-corp)
• S Corporation (S-corp)
• Limited Liability Company (LLC)

Any of the above business types should work for fundability purposes. But your selection may have tax and liability implications as well. Therefore, you may want to consult with an attorney and a tax professional before you choose the business entity that’s best for your situation. 

Select Your NAICS Code with Care

NAICS stands for the North American Industry Classification System. The system helps government organizations, regulatory bodies, and more classify businesses according to their purposes, along with the products and services they offer to others. 

When you register for a new business entity, your state may require you to select a NAICS code. If your state doesn’t require this selection when you register your business, it’s still wise to figure out the appropriate code. You’ll probably need to know it at some point in the future. 

Choosing the right six-digit NAICS code is important. Your choice can affect your business in several ways, such as:

• Fundability: The NAICS code you choose to classify your business can impact your ability to secure business capital (startup funding or otherwise). If your code indicates you operate a business in a high-risk industry, it could be a deal-breaker where fundability is concerned. 
• Taxes: Some businesses may be eligible to receive tax benefits and incentives according to their NAICS classification. 
• Contracts and Grants: Contracts and grants, such as those offered by the federal government, are other areas where your company’s NAICS code could have an impact. The NAICS code your business selects could determine whether or not you’re eligible for various opportunities.

Set Up an EIN Number

The next step in building a strong fundability foundation for your business is to apply for an Employer Identification Number (EIN). An EIN is another type of identifying number that works like a Social Security number for your business. 

Having an EIN can be essential in a number of situations, including: 

• Filing Taxes
• Opening Business Bank Accounts
• Applying for Business Financing  

It’s simple and free to apply for an EIN with the IRS. You can complete the application online, via mail, and even over the phone. 

However, be sure to set up your business entity with your state first. You’ll want to use the exact name of your business when you fill out your EIN application. 

Register for a D-U-N-S Number

When you establish your business as a separate entity, you have the opportunity to build credit in your company’s name. Yet even before you’re ready to build business credit, you can register for a D-U-N-S Number with the business credit reporting agency, Dun & Bradstreet. 

A nine-digit D-U-N-S Number is something that your business might need in a number of circumstances. If you want to work with certain entities, such as those below, a D-U-N-S number could be a prerequisite. 

• Vendors
• Suppliers
• Lenders
• Government Agencies

You have the option to establish a D-U-N-S number for your business, free of charge. The commercial credit bureau also offers an expedited service that can help you get a D-U-N-S Number and D&B® credit file for your company in five business days or less. 

Open a Business Bank Account

Opening a business bank account is a wise move for startup companies for a number of reasons. First, keep your business and personal finances separate for tax purposes. It’s also an important move where fundability is concerned. 

Having a dedicated business bank account helps your business to appear more credible in the eyes of lenders and investors. When you apply for a small business loan, for example, it’s common for the lender to ask to see several months of your business bank statements. 

Now, imagine you can’t supply the documents, or you have to use personal bank statements instead. In either scenario, there’s a good chance the lender will deny your financing application. But if you have a separate business bank account, you’ll be in a better position. 

Other Factors That Affect Business Fundability

Creating a fundable foundation is key if you want your business to pass through a fundability assessment with flying colors. Yet there are other important factors that affect your business fundability too — several of which have to do with credit. 

Business Financial Details

Having up-to-date financial information is a must when you apply for business financing. An investor (i.e., private capital, venture capital, angel investor, etc.) might want to scrutinize your business financial details before deciding whether to commit funding to your project. 

You may want to consider hiring reputable accounting and tax professionals to help if you can afford the expense. Having a professional prepare these important financial documents could help your business appear more credible to others. 

Below is a list of some of the business financial documents that a lender or investor might want to review when you’re seeking business capital.

• Business Tax Returns (Multiple Years)
• Business Bank Statements 
• Financial Projections
• Balance Sheet
• Profit and Loss Statement
• Cash Flow Statement
• Annual Revenue Statement
• Etc. 

Business Credit

When you establish a business the right way, it can open a business credit file and earn business credit scores. Good business credit is an important component of a fundable company. 

How much does a good business credit score really matter? According to the SBA, 20% of companies that apply for small business loans are denied based on the condition of their business credit. 

There are several ways to build business credit. Whether you’re starting a business from scratch or you haven’t taken the time to establish a business credit score before, here are a few strategies to consider: 

1. Business Credit Cards

Business credit cards are one way to establish a credit profile for your company. Credit card issuers typically check your personal credit as part of a business credit card application. With good personal credit scores, it could be easier to qualify.

Make sure that the card issuer will report the account to at least one of the business credit bureaus before you apply. The account won’t help you if it doesn’t appear on at least one business credit report.

You should also be sure to manage your small business credit card responsibly. On-time payments and maintaining a low credit utilization ratio are the habits that matter most. 

2. Business Credit Builder Accounts

Business credit builder accounts represent another tool that entrepreneurs can use to establish a business credit profile. These unique installment accounts can help you build a business savings account at the same time. 

The Credit Strong business credit builder account gives eligible small business owners the chance to establish a financial tradeline of up to $10,000. The funds aren’t released right away, but are held in an FDIC-insured business savings account.

You’ll make payments for up to 120 months. And with each payment, Credit Strong reports it to the main business credit bureaus. This setup gives you the chance to establish up to 10 years worth of positive credit history for your company. 

Personal Credit

Lenders and others often see small business borrowers as extensions of their owners. They may look for clues in the way a business owner manages their own credit for insight into how they might handle business credit obligations. 

A good personal credit score can be an asset in terms of your business’s fundability. Yet a bad credit score could hold you back from your business goals. 

If your personal credit rating is in bad shape, you may want to work toward rebuilding credit sooner rather than later. Remember, whether you’re building credit from scratch or attempting to overcome past credit setbacks, the process can take time.

Start by checking your personal credit reports from Experian, TransUnion, and Experian. If you discover mistakes on your reports, you don’t need to hire a credit repair company. But you may want to consider disputing those errors with the consumer credit bureaus on your own. 

Personal Finances

Just as your personal credit score could affect your business fundability, personal finances could come into play as well. As the founder of a small business, you might need to provide personal tax returns and other financial information when you seek business financing. 

Time in Business

Around two-thirds of businesses with employees make it to the two-year mark according to the SBA. Close to one-third of new businesses don’t survive that long. So, it’s understandable that some lenders may prefer to work with companies with an established track record. 

Depending on the type of funding you’re seeking, you might need to show that your company has been in business for a certain period of time. Two years in business is a common business funding requirement, but every lender and investor will have its own unique criteria. 

Availability of Collateral

Sometimes, borrowers take out loans and fail to repay as promised. Collateral gives a lender a way to recuperate some of its investment if this situation occurs.  

When your business can pledge assets to back a small business loan, it can serve as a sort of added insurance that helps reduce the lender’s risk. Having collateral can improve your company’s overall fundability score — making it more likely to qualify for the capital it needs. 

Fundability Criteria

The specific fundability criteria your business will need to satisfy can vary. Different lenders and investors may look at different information when determining whether or not your business idea is a good investment fit. 

We’ve outlined a number of common fundability details above that could impact your business, including: 

• Business Credibility
• Business Financial Details
• Business Credit Score
• Personal Credit Score
• Time in Business
• Type of Business (aka Business Industry)
• Market Opportunity
• Competition
• And More

Each lender or investor will have its own minimum criteria that your business needs to satisfy in each category of information that it considers.

With your personal credit score, for example, one lender might require a minimum FICO® Score of 680. Another lender, however, might accept a minimum score of 660 instead. 

Bottom Line

There are many details that small business owners must manage to succeed. Yet no matter how long your list of responsibilities grows, your business fundability deserves a spot on your list of priorities.

Even if you don’t plan to borrow money or seek private investment funds now, fundability still matters. There could come a time in your company’s future when the ability to secure business funding becomes important. 

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