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 capital can arise right from the startup phase and continue throughout the life of your business.

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

Building a business that qualifies for financing is critical to avoid these potential challenges. Understanding what makes a business eligible for funding and how it works is the first step toward achieving this goal.

What Is Business Financing Eligibility and How Does It Work?

At its core, financing eligibility refers to a business’s ability to access the capital it needs to launch, grow, or thrive. A business that qualifies for funding 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 eligible for funding? There are several components involved in the eligibility equation. The key is ensuring that others (banks, lenders, private investment sources, and more) see your business as credible and a worthwhile investment.

Financing eligibility comes down to risk and reward. If there’s a good probability that an investor or lender will make a return on their investment, your chances of securing capital increase.

The opposite is also true. If a lender or investor sees the risk of losing money as too high, you may face challenges in securing capital for your business.

How to Build a Business That Qualifies for Funding

Building a business that is eligible for financing requires you to view your business from the perspective of a lender or potential investor. What steps can you take to make your business more credible so that others might feel comfortable working with you?

Here are six actions to consider if you want to establish a solid foundation for obtaining funding.

1. Establish a Business Identity

Many parts of your business are intertwined with your personal life as a small business owner. Despite this connection, it’s essential to give your business its own identity.

Start by setting up separate contact information for your business, including:

• Business Name 
• Phone Number
• Address

It’s important to note that you can accomplish the goals above while still working from home if that’s your plan. A virtual office, for example, allows you to set up a separate business address for your company that isn’t a PO Box.

Along with establishing separate contact information, you’ll also want to secure any required business licenses and permits. Having a professional website and a business email address that matches your company URL is also important.

2. Choose Your Business Entity

Another essential step in building a business that qualifies for financing is selecting the right business structure. If you want a company that can attract investors and qualify for financing, your best options are typically one of the following:

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

Any of these business types should work well for securing funding, but your choice will also have tax and liability implications. You may want to consult with an attorney and a tax professional before choosing the business structure that’s right for your situation.

3. Select Your NAICS Code with Care

NAICS (North American Industry Classification System) is a system that helps organizations classify businesses based on their activities and the products or services they offer.

When registering a new business, your state may require you to select a NAICS code. Even if it’s not required at registration, it’s wise to determine the appropriate code, as you’ll likely need it later.

Choosing the right NAICS code is important because it can affect:

• Eligibility for Financing: The NAICS code you choose could impact your ability to secure capital. If your code indicates that you’re operating in a high-risk industry, it could be a deal-breaker.
• Tax Benefits: Certain NAICS codes may qualify your business for tax benefits.
• Contracts and Grants: Government contracts and grants often depend on your NAICS code.

4. Set Up an EIN Number

Another critical step is applying for an Employer Identification Number (EIN). An EIN is like a Social Security number for your business.

Having an EIN is necessary for several purposes, including:

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

Applying for an EIN with the IRS is simple and free. You can complete the application online, by mail, or over the phone. Be sure to set up your business entity with your state first and use your business’s exact name when completing the EIN application.

5. Register for a D-U-N-S Number

After establishing your business entity, you can begin building your company’s credit by registering for a D-U-N-S Number from Dun & Bradstreet.

This nine-digit number is often required when working with vendors, suppliers, lenders, and government agencies.

You can register for a D-U-N-S number for free. There’s also an expedited service that can help you get your D-U-N-S Number and credit file in five business days or less.

6. Open a Business Bank Account

Opening a business bank account is crucial for keeping your personal and business finances separate. It’s also important for showing credibility to lenders and investors.

When applying for a small business loan, lenders will often ask to see several months of your business bank statements. If you can’t provide these documents or must use personal bank statements, the lender may deny your application. However, having a separate business account can improve your chances of approval.

Other Factors That Affect Financing Eligibility

In addition to establishing a strong foundation, several other factors affect your eligibility for funding, particularly related to credit.

Business Financial Details

Having up-to-date financial records is essential when applying for business financing. Investors and lenders will review documents like business tax returns, bank statements, and financial projections to assess the viability of your business.

Business Credit

When you set up your business properly, it can begin building a credit profile. Good business credit is an important factor in qualifying for capital.

Personal Credit

Since lenders often view small business owners and their companies as one entity, your personal credit score can impact your business’s eligibility for financing. A high personal credit score can be beneficial, but a low score may limit your options.

Personal Finances

Along with your credit score, your personal finances may come into play when you apply for financing. Business lenders may request personal financial documents to evaluate your ability to repay loans.

Time in Business

Many lenders prefer to work with businesses that have been operational for at least two years. If you haven’t yet reached this milestone, it could affect your eligibility for funding.

Availability of Collateral

Offering collateral can improve your chances of securing financing by reducing the lender’s risk.

Eligibility Criteria

Different lenders and investors have their own criteria for evaluating whether your business is a good investment. These criteria may include your business credit score, personal credit score, time in business, and industry, among others.

Bottom Line

There are many details small business owners need to manage, but business financing eligibility should be a priority. Even if you’re not currently seeking funding, understanding how to make your business eligible for future financing is essential to its growth.

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