Funding a Startup with Spotty Credit
Know the five “C”s before
going for that loan
By Tracy Barbour
Funding a Startup with Spotty Credit
Funding a Startup with Spotty Credit
Know the five “C”s before
going for that loan
By Tracy Barbour

ew endeavors are more exhilarating than launching a business—especially for entrepreneurs who have an impressive business concept and credit history.

For them, it may be relatively easy to secure a loan to finance a business venture. But that’s not the case for individuals who don’t have the best credit or business idea. Thankfully, there’s a diversity of approaches budding business owners can take to overcome their shortcomings and get the funding they need.

Qualifying for a Loan

Having the aspiration to start a business is one thing, but qualifying for a loan to make it happen is another story. So it’s essential for borrowers to understand the requirements they must meet to gain loan approval. Most banks, credit unions, and other lending institutions assess borrowers using what’s known as the 5 “C”s of Credit. These areas—credit history, capacity, capital, collateral, and conditions—help lenders gauge the creditworthiness of loan applicants.

Wells Fargo, for example, closely scrutinizes borrowers’ personal and business credit (if available) as well as their credit history with the bank itself, according to Andrew Foust, Wells Fargo’s Alaska small business leader, who is based in the San Francisco Bay Area and covers Alaska. This information shows their track record for managing credit and making payments over time, indicating their credit risk. Capacity—the income amount, type, and stability—is also important because it indicates the loan applicant’s ability to repay the loan. Collateral (if required) can be used to help repay the loan in case of default, and capital involves liquid reserves such as savings and investments that can help the business owner ride out setbacks.

Conditions is a broad area where the lender considers the purpose of the loan and intended use of the funds. “That’s all the other facts of that deal that impact the likelihood of repayment,” Foust explains. “For example, in Alaska, one of the conditions we have to assess when doing commercial fishing vessel loans is the value of their fishing license and what their catch will be.”

However, Foust says, managing risk in lending is dependent upon the unique aspect of each deal, so Wells Fargo uses a personalized approach to try to meet the financial needs of business owners. “Well Fargo wants to make every responsible loan that we possibly can to every creditworthy business that is pursuing financing,” he says.

First National Bank Alaska also strives to make good loans to as many businesses as possible, and its loan qualification process really depends on the financial strength of the business owner and other relevant factors. “Every loan will be different; it’s not a cookie-cutter approach,” says Sheila Lomboy, vice president of corporate lending at First National.

Andrew Foust
Andrew Foust
Alaska Small Business Leader, Wells Fargo

Wells Fargo

Sheila Lomboy
Sheila Lomboy
Assistant Vice President Corporate Lending, FNBA


In general, First National reviews two to three years’ worth of business and personal financial statements when evaluating loan requests. Existing enterprises that are seeking funds will likely need to also submit a detailed business plan. Business owners should also build a relationship with their banker. “As an owner, you know the ebb and flows of your business, and a banker wants to know all of those,” Lomboy says. “Having that ongoing communication will help the banker understand that business and be able to provide the tools to help the owner succeed.”

At Northrim Bank, loan qualification is also heavily contingent upon the borrower’s demonstrated ability to repay. That means evaluating historical numbers. “The bank would like to see cash flow that is 1.25 times the amount of the annual loan payments,” says Allen Hippler, vice president, commercial loan officer at Northrim Bank. “Other factors include having collateral, the ability to manage the business well, and a good credit history.”

So is it possible for borrowers to qualify for a loan if their credit is blemished? Possibly. Hippler explains: “To convince a bank to look beyond poor credit history, it would be helpful to have a good explanation of why there was poor credit in the past and what you have done to change this behavior. After this, the bank may require some more money down or extra collateral to be offered.”

He adds: “Another option would be to scale back your business plan to the point where you can make a significant cash injection relative to the size of the project. This shows your commitment and decreases risk.”

Sometimes, asking the bank if there is any potential counteroffer can be helpful. “A bank may assume that if it cannot offer you exactly what you need, that you will not be interested,” Hippler says. “So, turn a ‘no’ into a ‘not now’ by asking how the situation can be changed in the future so that the bank could advance the loan.”

Allen Hippler
Allen Hippler
Commercial Loan Officer
Northrim Bank

Northrim Bank

Leveraging a Loan Guarantee Program

Borrowers can also capitalize on a loan guarantee program and other resources to enhance their loan application. Loan guarantee programs can be a viable option for enhancing the ability of borrowers—particularly women and other minorities—to secure financing for their new business.

Government entities like the Small Business Administration (SBA), Alaska Industrial Development and Export Authority (AIDEA), and the Bureau of Indian Affairs (BIA) guarantee repayment of business loans. This reduces the risk for lenders and increases the likelihood of loan approval for borrowers—including those without the strongest financials.

SBA works with eligible lenders to facilitate a variety of loans to small businesses, including loan programs specifically geared for minorities and women. SBA does not lend money directly to business owners, but it sets guidelines for loans made by partnering lenders like First National, Wells Fargo, and Northrim Bank; by community development organizations; and by micro-lending institutions. SBA guarantees the repayment of the loans that its partnering lenders make.

“Every loan will be different; it’s not a cookie-cutter approach.”

—Sheila Lomboy Vice President of Corporate Lending First National Bank Alaska

One of SBA’s key loan programs is 7(a), which allows businesses to borrow $50,000 to $5 million to start or acquire a business. The funds can be used for various purposes, including land, buildings, equipment, inventory, and working capital. Other SBA loan programs include CDC/504, Community Advantage, and Microloan.

In addition, AIDEA provides a number of different programs aimed at financing business, nonprofit, and community projects that have meaningful economic development impacts. AIDEA’s programs provide different opportunities for funding and can be used for new businesses, business expansion, upgrades, capital projects, machinery and equipment, and other business needs.

AIDEA provides financing in areas that include loan guarantee programs, loan participation, bond financing, and investment financing. A public corporation of the state, AIDEA strives to promote, develop, and advance the general prosperity and economic welfare of the people of Alaska.

BIA may be another option available to eligible loan applicants. The organization’s mission is to enhance the quality of life, to promote economic opportunity, and to carry out the responsibility to protect and improve the trust assets of American Indians, Indian tribes, and Alaska Natives. BIA’s Indian Guaranty Loan Program facilitates access to credit obtained through approved lending institutions by guaranteeing repayment of up to 90 percent of the loan value. This stimulates the supply of capital for Indian-owned businesses that otherwise may not get funds.

Hippler points out that BIA and SBA are generally designed to help a business get a loan when the idea and loan are already sound but just need a little help to get approved. “They are not designed to compensate for a serious flaw in the business but can make deals possible for the bank and the borrower that were too much of a reach without the SBA or BIA,” he says.

Northrim has had a lot of success working with the BIA loan guarantee program, which is open to businesses owned and controlled by tribal enrollees. However, the bank tries to ensure that all qualified applicants, including women and minorities, have the best opportunity to attain financing, which includes the use of the BIA, SBA, and US Department of Agriculture (USDA) programs, Hippler says. “We succeed when you succeed, and we come up with creative solutions to help you succeed.”

Non-Bank Financing Options

Entrepreneurs with off-beat business ideas and weaker credit can also explore non-traditional options. For instance, business owners can explore the financial resources of Evergreen Business Capital Community Finance (EBCCF), Alaska’s only authorized SBA Community Advantage Loan Program lender. EBCCF offers flexible loans for small financing projects, including start-ups. Loans are up to $250,000 with terms as long as ten years. As a nonprofit lender, EBCCF strives to maintain competitive interest rates.

When it comes to lending to new businesses, the risk tolerance may be higher with the Community Advantage Loan Program than traditional banks’ products, according to Theo Ransum, programs loan officer with EBCCF. “Banks also may require more in equity contributed by the borrower than our program requires—30 percent or more as compared to our 10 to 20 percent,” he says.

In terms of loan qualifying, start-up businesses will need to provide a detailed business plan as well as projections of their assumed earnings. In addition, EBCCF may take additional steps to strengthen loan requests. Ransum says, “We would certainly consider the value of business property such as real estate and equipment to collateralize the loan. With the understanding that new businesses might not yet have those types of assets, a careful assessment of the business’ and borrower’s cash flow is made. In some cases, we would possibly collateralize personal assets.”

EBCCF also offers a microloan to fund projects up to $15,000. The loan has a five-year term with 100 percent financing in some cases. In addition, EBCCF provides technical assistance to borrowers and directs them to organizations such as the Alaska Small Business Development Center or Alaska SCORE for more in-depth assistance. SCORE is a nonprofit association dedicated to educating entrepreneurs and helping small businesses start, grow, and succeed nationwide.

Alaska Growth Capital (AGC) BIDCO is another alternative lending organization. AGC provides financing for all business needs, including construction lending, working capital facilities, equipment purchases, and leasehold improvements. They also participate in the SBA and USDA loan guarantee programs. Loans range from $100,000 to $10 million and normally have terms from three to twenty-five years.

Angel investors, which are often family and friends, also represent a popular non-bank source of business financing. They are willing to infuse a startup company with cash or capital in exchange for ownership or convertible debt because they believe in the company and think it will succeed.

Crowdfunding may also be a viable way to get a new business enterprise off the ground. One of the most prominent examples is Kickstarter, which significantly reduces the funding barrier for entrepreneurs with compelling projects. “There’s no financial debt on their side because they ask others to gift them the funds,” Lomboy says.

Other Possible Funding Resources

Credit-challenged entrepreneurs often manage their financial needs through self-funding, tapping their savings, 401K, or other investment accounts. However, Lomboy advises self-funding business owners to consult with their accountant about the potential withdrawal penalties that could undermine their retirement goals.

As another self-funding option, those who don’t have enough liquid cash reserves can use the equity in their home to fund their business. While this can be a relatively easy business-financing solution for homeowners, it can place their property at risk if they default on the loan.

Getting a secured credit card may also be a possible alternative for some people. The secured credit card can be a good first step because it helps build the relationship with the bank and it helps with the personal credit score. And as another option, less established individuals may consider either buying or buying into an existing business by pursuing an owner-financing arrangement. “That allows them to build equity in the business while they address credit issues that may be holding them back,” Foust says.

Owner financing is fairly common in business, and it generally offers flexible repayment terms. “I’ve seen them one, two, and three years. And amortizations will vary from five to thirty years,” Foust says. “Ultimately, most of these types of deals end up with a balloon payment where they buy out the end of that contract.”

Existing business owners seeking cash to fund a new venture or for expansion may be able to take advantage of factoring. Factoring, or selling accounts receivables to a third party at a discount, can be helpful to an established business that is rapidly growing, according to Hippler.

Every Business Is Different

There’s no one financing solution that fits everyone. And that’s especially true for loan applicants who have less than perfect credit or a quirky business idea.

That’s one of the reasons Wells Fargo fully implemented its Fast Flex Loan program last year to address a broader segment of borrowers. Under the program, Wells Fargo customers who could not qualify for traditional financing can apply for a Fast Flex loan online and can get their application reviewed very quickly. So far, Fast Flex has been instrumental in helping a number of Wells Fargo customers obtain small loans. “We’ve been able to expand our ability to lend beyond the areas we were able to in the past,” Foust says. “The reason we’re able to approve those customers is that they often have a strong cash flow that may offset other negative issues.”

Wells Fargo also has a phone-based credit coaching program that is available to all its small business customers in Alaska and elsewhere who have been declined for business credit products offered through its retail banking branches. The coaches—who are located at Wells Fargo facilities in Chandler, Arizona, and Charlotte, North Carolina—proactively call customers and work with them to help them get the credit they need. Foust explains: “We find that in that process we can make short-term adjustments and maybe reverse that initial decline. We can turn around and get them access to the credit they need months or a year later, depending on the significance of the reason why they were declined.”

Over the last three years, Wells Fargo credit specialists have conducted more than 25,000 credit coaching calls with business customers.

Foust points out that if someone has a poor credit history, they’re always going to have that as a challenge if they don’t address it. Thankfully, a credit history isn’t permanent. The first step to remedying the problem is to take the time to learn exactly what those issues are and resolve them. “Start by getting copies of all your business and personal credit reports,” he says. “If you can’t decipher them, get help from your banker. From there, we can make a plan to help based on that unique situation.”

Lomboy’s best advice for new small business owners is to build and maintain a relationship with their banker. She says, “They can provide you with those financial tools to succeed in your industry. Having that ongoing communication is key. Full disclosure helps build trust, and as you build trust on both ends, you can succeed better.”