There are key steps you should take before applying for a loan that will make you eligible for more loans at lower interest rates. We are calling them your funding toolkit.
Before we begin...If you are a sole proprietor or a general partner in a partnership, any loan or trade financing will affect your personal credit and vice-versa. The only way to separate your personal from your business credit is to incorporate or form an LLC. You can still do all the steps below to improve your overall credit.
Your funding toolkit should include:
Click here for information on participating in Dun & Bradstreet's Trade Reporting.
Here's how to improve your loan options and the interest rate:
To get your Paydex score
You can pay D&B to set up your Paydex score
Your Paydex score can change or go away
To improve your personal credit score
To borrow money from a traditional bank, you need a good credit rating, a business plan or financial statement, and the willingness to personally guarantee the debt (i.e. use your personal assets to pay the debt if needed).
To raise capital (either loans or equity) from other sources (crowdfunding, angel investors, etc.), you need a Story, a Team, and Supporters.
Paul Niederer of Crowdfundbeat.com has summarized this:
These have to work together to show:
Below, is Niederer's 50-point scorecard, which he calls the Fundability Evaluation Tool. If your audience doesn't give you a score of 35 or more... he says you're not ready to raise capital.
Keeping accurate books and records is essential for any successful business. If you have very simple accounting needs, there is free online bookkeeping software at www.outright.com. If you have simple bookkeeping needs with 20 or fewer customers, you can use Quickbooks Simple Start online for free. Click here for more information.
Most small businesses with more than 20 customers use Quickbooks, Peachtree or Microsoft Money, although there are 100+ choices.
Many businesses have specialized needs - including purchase orders, inventory, manufacturing, donations, etc. Findaccountingsoftware.com is a free service that helps businesses identify the best accounting software for their business. There are two steps: completing a short survey and then a followup phone conversation with a consultant. You can also download their Buyer's Guide and do the research yourself. Click here to go to www.findaccountingsoftware.com.
The faster you get paid, the stronger your business will be. If you can invoice customers by email, you are speeding your collections cycle by one to three days. If you accept credit cards, you are speeding it even more.
If you don't believe that collecting money quickly is important to your business, use the cash flow calculator with your profit and loss and balance sheet (or your projections). You will quickly see that improving the speed of your collections is just as important as your profitability.
Fortunately, there are many online services that help businesses collect money quickly - both through online invoicing and credit card processing. Both banks and independent businesses offer these services.
Credit card processing
There are several considerations in choosing the type of credit card processing system to use. If you have a simple business with just a few price levels, you can choose a system such as PayPal, where you put buttons on your website that send people for credit card payment. If you have many products or changing prices, you can consider a shopping cart solution, that is often available through your website host. In both of these cases, the purchaser provides their information through the processor, and you never handle the credit card information.
You can also manually swipe a credit card. There are low cost solutions (such as Square) or standard solutions through bank credit processing systems. Swiped cards generally have a slightly lower transaction fee because there is usually less opportunity for fraud and incorrect information. Standard services have monthly fees (often two fees - one for the processor and one for the bank) plus per-item percentage charges. Low cost solutions usually do not have monthly fees.
If you are selling to large companies or the government, you need to find a credit card processor that handles Level II and Level III credit card transactions. This specialized processing allows companies and government agencies to issue p-cards (purchasing cards) to their employees. These p-cards allow employees to purchase items that are combined and reported as one transaction to the company or agency. Level II transactions require information on the seller (whether they are a minority or other disadvantaged business) and sales tax. Level III transactions require all the information for a Level II transaction plus information that you would put on a purchase order and invoice (description, quantity, discounts, etc.) Setting up Level II and Level III credit card processing is significantly more complex. However, if you do not have this processing, you cannot receive orders from government agencies or companies using p-cards. So if they are your target market, it is critical that you choose a credit card processor with this capability.
Another consideration in credit card processing is whether it is integrated with your accounting system. If you can get a processing system that automatically loads information into your accounting system, you will save time and improve your business' financial records.
If you want a loan, you'll need to provide financial statements. Here are some tools to help you understand accounting and financial statements.
Bean Accounting 101 - an audio-visual crash course in beginning accounting
Bean Counter's Accounting and Bookkeeping Tutorial
Understanding where you Stand (for use if you already have financial statements)
A win-win-win for you, your customers and your vendors.
Businesses develop credit history through a voluntary system operated by Dun & Bradstreet. Participating companies upload their accounts receivable each month. Until recently, this process has been difficult and costly for small businesses to participate in.
However, now there is an easy, free way to establish a business credit history. Dun & Bradstreet has a program called D&B Trade Exchange, where businesses with 300 or more active accounts can use Quickbooks to easily report their accounts receivable information into the system.
There are three major benefits you can receive by using this system, and one benefit your customers will receive:
Benefits to you:
Benefits to your customers:
Click here for program information.
Another way to build credit: D&B service will call your vendors
For a monthly fee, Dun & Bradstreet will call your vendors to create a credit score for your company.
For the best business credit score, lenders are looking for on-time payments for
Your credit cards should NOT be at or over the limit. Plus, bankers are looking for an average bank account balance that would easily pay for the new loan payments.
If you can show these, you should be eligible for the best rates.
Home equity and savings can be more useful as collateral for a loan than if you spend it directly. If you have $20,000, it can be used as 20% collateral on a $100,000 loan - giving you 5 times as much funding.
Watch out, however. If your business fails, you will owe the full $100,000.
Regardless of whether you use the funds directly or as collateral, it is important to have a plan that clearly shows that you can breakeven and pay back any loans.