If you’ve been in business at least a year, it’s time to apply for a small loan — $1,000 to $3,000 — to pay for some services or products such as a printer or a new computer. You don’t even have to need the loan. Remember, your goal is to build your business credit history. You can secure the loan and deposit it in a savings account in a different bank. It doesn’t matter whether you spend the money immediately, or not at all.
With your sufficient cash flow and excellent Paydex score, which you’ve diligently built over the past year, your business should be easily approved for a loan. After all, credit history is one of the most important factors lenders look at before they will agree to loan you money.
It’s a good idea to double check your credit history at eUpdate before walking into your local bank for a loan. Correcting erroneous data or resolving any inconsistencies before applying for a loan will increase your chances of getting one.
Once you secure the loan, ask for 90-day terms. Repay the loan, in full, in 60 days. Wait a month. Apply for another loan for a slightly larger amount — $3,000 to $5,000, for example. Again, ask for 90-day terms and repay in 60 days. You have now proven that you can be trusted to borrow and repay loans on time.
Why are you applying for a loan, even if you don’t need it? Because in business credit, there is the 5-3-2 rule. For a solid business credit record to be established, a company needs to have five active trade accounts, three business credit cards, and two small loans paid in full.
Six months after you secured your first loan, apply for a line of credit. A business line of credit gives you access to cash, whenever you need it, up to a pre-set limit. The main advantage of a line of credit is flexibility. Funds are always available when you need them, but you pay no interest until you draw on the line, which makes it great for emergencies. Again, visit the bank you’ve established a relationship with. It’s best to open a line of credit when you don’t need it. Think of it as your rainy-day fund.
By tapping into this line of credit for your largest expenses and ones you cannot pay off immediately, you can continue to pay off your trade accounts and credit card balances in full each month and your Paydex score will be as high as possible. When seeking a line of credit, also be prepared with financial documentation such as income statements and tax returns.
Many business owners actually prefer business lines of credit over loans. But for the sake of building business credit, it makes sense to secure a business loan first so that you can ultimately qualify for a line of credit down the road. Here are some of the advantages of opening a business credit line.
- Lower interest rate than credit cards. While rates for credit lines are generally higher than conventional bank loans, they are still lower than credit card rates.
- Improved cash-flow management. A credit line can help you even out cash flow when fluctuations are predictable, seasonal, or industry-specific. For example, if you routinely purchase inventory that you won’t sell for several months, a line of credit can be a great option.
- Ability to make purchases too large for a credit card and too small for a loan. There may be times when you need to buy supplies or inventory that are too expensive to put on a credit card, but not high enough to warrant taking out a conventional loan. A credit line can cover these costs as long as you do not exceed the maximum amount and pay off the balance within the designated timeframe.
- Emergency funds. A line of credit is a good buffer in tough times. But use it wisely as a credit line is no solution for extended cash crunches.
Build your business credit as you would anything else: Plan your strategy, take daily steps forward, and, ultimately, achieve your goal.