»Business Credit»Six Steps to Business Credit - Step 5: Apply for a Business Loan

Six Steps to Business Credit - Step 5: Apply for a Business Loan

Once your business has been operating for at least a year, you should apply for a business loan. It doesn’t have to be a big loan; rather, it should be for around $1,000 to $3,000, and can be used to pay for some business expense 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 you spend the money on – or if you spend it at all. In fact, you could even put the money into a different account in a different bank.

Assuming you have been following the suggestions in this series of articles and now have an excellent PAYDEX and good cash flow, you shouldn’t have any trouble securing a small business loan. Since credit history is 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 iUpdate. Make sure you correct any incorrect data and address any inconsistencies first. A clean credit history will greatly increase your chances of landing a business loan.

Once you are approved for a loan, ask your lender for a loan with 90-day terms. Then, in 60 days, repay the loan in full. One month after you’ve done that, apply for a second loan. The second loan should be for a larger account, say, $3,000 to $5,000. Repeat the same process of asking for terms of 90 days and repaying in full in 60 days. Now, in just five months, your business has proven that it is trustworthy in borrowing and repaying loans.

Many of you are probably scratching your head about why you should apply for a loan if you don’t need the money. There is logic behind this advice: business credit is governed by the 5-3-2 rule: a company must have five active trade accounts, three business credit cards, and two accounts paid in full in order to be considered “established.”

Now that you’ve established your business using the 5-3-2 rule, it’s time to apply for a 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 line of credit.

Opening a business line of credit enables your business to:

Next: Step 6: Continually Improve Your Business Credit

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