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How Your Small Business Can Access Low-Cost Debt Capital

Posted by Early Growth

June 17, 2014    |     5-minute read (908 words)

This guest post was contributed by Chinwe Onyeagoro, CEO and Co-Founder of FundWell.

Monitoring The 4 Cs

We all know the importance of health and wellness when it comes to our bodies and minds. We take regular steps — exercising, eating well, and managing stress to prevent major health issues and maintain quality of life.

We recommend applying this same focus when it comes to your small business' financial health. There are 4 “vital signs” you can use to assess the state of your business' financial health as well as your eligibility for financing. Working to improve these on an ongoing basis will enable you to access more and higher quality funding sources.

While each business has unique needs and metrics when it comes to financial health, there are some basic practices and principles to focus on to keep these indicators and your debt financing eligibility on an upward trajectory.

1. Cash Flow

— is a crucial indicator because it determines your ability to keep operating your business.

Growing too fast without managing expenses can be just as dangerous as declining revenues. Track cash flow weekly using your accounting system, which should be integrated with your bank account. That way you will always have an accurate reflection of how much money you have in the business.

Lenders also want to see that your business has taxable income, an indicator that you have the cash flow necessary to service debt. Consider how you can stage your growth in order to manage expenses while keeping more of your dollars invested the business.

2. Credit

— comes in two forms: personal and business. It’s important to manage both in order to maximize your access to low-cost financing. The top steps to take in this area are: 1) paying bills on time, 2) making sure your debt-to-credit ratio is 25% or lower, and 3) ensuring you have enough income to cover existing loans and liabilities.

By vigilantly making payments and keeping your debt balances under control, you'll maintain your credit score at an attractive level. If your credit history has already been tarnished, make sure you are able to explain any blemishes.

Review your total credit exposure, financing costs, and future needs during your month-end reconciliation process and especially before taking on new debt. And always do a cost/benefit analysis when making large purchases, especially in the early stages of your business.

3. Customers

— are the reason your business exists. Do your best to cultivate long-term relationships.

Some key pointers: diversify your customer base and try to ensure your revenue flows evenly and consistently throughout the year.

Typically, a business should not derive more than 25% of its revenue from any single customer or contract. Customer diversity gives lenders a level of comfort that you will be able to repay obligations regardless of seasonality, industry volatility, and other unexpected developments. Review your client mix on a quarterly basis to uncover opportunities for diversification, new channels, or target markets.

In addition, lenders like to see repeat customer activity and short accounts receivables collection cycles. Track revenue, A/R, and collections daily, weekly, and/or monthly depending on your type of business and its typical A/R cycle. The more often you look at your numbers the earlier you'll be able to catch and address any issues. All of these factors are typically correlated with more predictable and profitable sales.

4. Collateral

— is especially important for debt financing. Generally, the more assets you have, the more comfortable a lender will be. It is also advantageous to have a mix of fixed and liquid assets. Review assets quarterly, unless there is a catalyst for assessing them more frequently.

If you have personal assets that you will be using as collateral for your business, consider transferring those to the business. If you have to personally guarantee a loan, your home, mutual funds and stocks are good personal assets, while equipment, real estate, and accounts receivable are good business assets.

Do a cost/benefit analysis when deciding to buy or lease any fixed asset over $3,000 to evaluate how it will impact your business' balance sheet.


Depending on the funding product you apply for, lenders may care more about certain indicators than others. For example:

Merchant cash advance providers

care a lot about a business' credit card-driven revenue.

Asset-based lenders

care most about your fixed (e.g., property and equipment) and liquid (e.g., purchase orders, receivables, and stock) asset values.

Other institutions

lend based primarily on the quality and credit of your customers and your tenure with them.

To keep track of your business' 4 Cs , create a financial wellness dashboard to provide a snapshot of how you are doing in each of these critical areas; then develop a performance improvement plan with specific steps and targets. This could be as simple as creating a spreadsheet – the key is to monitor it regularly.

By focusing on the 4 C’s, any small business can take tactical steps to improve its financial health, while increasing its likelihood of securing debt capital at attractive rates.

Chinwe Onyeagoro is co-Founder and CEO of FundWell. Prior to FundWell, Chinwe co-founded boutique consulting firm O-H Community Partners (OHcp). FundWell helps small businesses access financing by making lender referrals, assisting with loan applications, and providing advice on how to improve financial health. Email to learn more.

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