Once your business has been operating for at least a year, you should consider applying for a business loan. While many banks require two or more years in business before extending a loan, there are alternative lenders who may work with you before that time. And while large banks will lean toward larger loan amounts, usually in excess of $25,000, there are lenders who specifically handle smaller loans. You should consider all options, but it doesn’t have to be a big loan. It could be for around $1,000 to $3,000, and can be used to pay business expenses like computing equipment or other business services. The purpose of applying for such a loan is to continue to build business credit history, so it doesn’t matter what business expenses you spend the money on – or if you spend it at all. Keep in mind, however, that banks that offer larger loans may encourage you to open a credit card instead of extending you a small loan.
Assuming you have been following the suggestions in this series of articles and now have a strong PAYDEX® and good cash flow, you shouldn’t have trouble securing a small business loan. Since credit history is usually the most important determinant of whether banks will give a small business a loan, it’s critical to make sure your PAYDEX score and cash flow are in order.
Before applying for a business loan, you should also check your business’s credit history at Dun & Bradstreet Credibility Corp.’s Company Update. Make sure you correct any incorrect data and address any inconsistencies first. A clean business credit history will greatly increase your chances of landing a business loan.
After you are approved for a loan, ask your lender for a loan with 90-day terms. Some banks may want longer terms or have steep early payment penalties; you must always read all fine print in order to understand fully your specific loan. However, if your bank will give you 90-day terms, then try to repay the loan in full in 60 days. One month after you’ve done that, apply for a second loan. The second loan should be for a larger account, for example, $3,000 to $5,000. Repeat the same process above of reviewing the fine print then asking for terms of 90 days and repaying in full in 60 days. Now, in just five months, your business has helped prove that it is trustworthy in borrowing and repaying loans.
Similar to business credit cards, the 5-3-2 guideline for better business credit can be applied here: a company should have five active trade accounts, three business credit cards, and two accounts paid in full in order to be considered “established.”
Once you’ve established your business using the 5-3-2 rule, it’s time to apply for a business line of credit. Go back to the bank with which you’ve already established a relationship. Ideally, the timing of the application would be six months after you secured the first business loan. Business lines of credit enable you to access cash (up to a pre-set limit) whenever you need it. They provide your business with flexibility to obtain funds anytime but not pay any interest until you draw out cash. Think of it as “rainy day” money that will be available in an emergency.
Given the choice, many businesses would prefer to obtain a business line of credit before securing loans. However, when it comes to building business credit, securing a loan first enables your business to eventually qualify for a business line of credit.
Opening a business line of credit could enable your business to:
- Improve your cash-flow management. Cash flows often fluctuate due to seasonal or industry-specific factors, and a business credit line can help even them out. For example, a line of credit would benefit a business that regularly purchased raw materials or inventory that will not be sold for several months.
- Secure lower interest rates than it could with credit cards. Although credit line rates are usually higher than those found in business bank loans, they almost always beat business credit card rates.
- Make mid- to large-sized purchases. Some business purchases are too large for a credit card, but too small for a business loan. In these cases, a business line of credit can cover those costs. However, it is very important that you do not exceed the credit line’s limit and pay off the balance in a timely manner.
For more information, please visit DandB.com or call 1-800-280-0306.
This article originally appeared in Dun & Bradstreet Credibility Corp.'s Credit Resources.
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