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:

• Your personal credit score.
• You can check your credit history for free and obtain your credit score for about $5 by going to www.annualcreditreport.com. By law, you are allowed one free credit history from each of the 3 major reporting agencies each year. Annual Credit Report was set up by the major reporting agencies to comply with the law.
• You also have the option to pay a small amount (about $5) to get your credit score. A score of 620 to 650 indicates basically good credit. A score above 680 will most likely qualify you for the best rate.
• How is your credit score calculated? MyFico's website shows what goes into your credit score and how to improve it. Click here to visit the site.
• Your personal income taxes for the past 3 years.
• Your business formation papers and your federal employer ID number.
• See the business formation section of the Tools for help.
• Your business financial statements for the past 2 years (or since you began business) - balance sheets and profit and loss.
• Basic business services: business phone (not your home phone), website, business or home-office address (no PO Box). These show you are in business.
• An average bank balance of $7,000 for 3 months prior to requesting a loan (even if you use borrowed money to reach this balance).
• This amount is to get you good to excellent credit - so if you don't have this amount, do all the other items for your toolkit.
• Your business' D&B (Dun & Bradstreet) number.
• To obtain a free D&B number, click here and enter your business ownership information. This number does NOT establish business credit. The only thing that establishes your credit is when vendors report your payments into the system (see next bullet).
• At least five (5) vendors willing to report to Dun & Bradstreet that you are making payments on time.

Click here for information on participating in Dun & Bradstreet's Trade Reporting.

• Amount of your savings or home equity that has not been pledged.
• A short business plan showing how you want to use the money and how you will pay it back (2-3 pages)

Here's how to improve your loan options and the interest rate:

• Lenders will be evaluating your FICO (personal credit score), your PAYDEX score (how promptly you pay your business bills), and your average bank balance.
• For the best rates, you need a FICO score of 680 or more and a Paydex score of 75 or more.
• Your average bank balance needs to pay for debt service, or you have to show that your loan funds will increase your cash flow.
• Your Paydex score is based solely on voluntary vendor reports on how quickly you paid your invoices. Since the Paydex reporting system is voluntary, only a few vendors report to Dun & Bradstreet, making it unlikely that your business will be reported. Getting a Paydex score requires at least 5 reports per month on your business.
• So, the best way to get and improve a Paydex score is to ask your ongoing vendors to use Dun & Bradstreet's free reporting system (called Trade Reporting). If your vendor uses Quickbooks, there is a free plug-in that makes monthly reporting a breeze.
• In addition to getting your vendors to report, you should also use their system to report your customer's payments - so they can build business credit, and to encourage them to pay you on-time.
• All of this is explained in a workbook by Businessfinance.com. This is a 7-step method to establish good business credit. (Ignore the publication's information that sole proprietors cannot get a credit score. We confirmed with D&B that sole proprietors are treated the same as corporations or LLCs.)

To get your Paydex score

• You can find out your Paydex score by paying Dun & Bradstreet $119, or you can get it for free, as a thank you for participating in D&B's free Trade Reporting program. Participants receive one free report per month. You can use to monitor your Paydex score.

You can pay D&B to set up your Paydex score

• For a fee, you can provide Dun & Bradstreet a list of your vendors and they will call your vendors to create a Paydex score.

Your Paydex score can change or go away

• To keep or improve a Paydex score, Dun & Bradstreet must receive at least 5 reports on your business each month. So once you have found five companies willing to report, keep on buying from them and pay on-time!

To improve your personal credit score

Credit Repair Kit

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:

• A Story told with clarity. It needs to be convincing, compelling and credible
• An enthusiastic, grounded Team. It needs to be a balanced (Steve Jobs and Steve Wozniak), passionate, capable and likeable Team.
• Supporters who believe in what you are doing. There needs to be lots of suitable people to share the story with and engage with.

These have to work together to show:

• Relevance. The story being pitched needs to be relevant to the supporters of the product, the service, the technology, the team, the geography or for whatever reason they are 'supporting'.
• Capability. The team must be capable of implementing the story they are selling.
• Credibility. The supporters need to see the team as credible and worthy of their trust.

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.

• Using Technology to Improve your Cash Flow - a Video Tutorial from SCORE

• Free Workshops on Managing Your Finances

• Marketing 101: A Guide to Winning Customers

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.

• Learn Quickbooks - Free Tutorials

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)

• Loan Documentation - An Introduction for Small Businesses

• Estimating Breakeven Sales for Your Small Business

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:

1. You can build an excellent business credit score by getting 5 vendors to use the system, put you on a 30 day net payment system and report your payments.
2. You can report your customers' payment practices, giving them an incentive to pay you quickly.
3. Each month that you upload the information from your Quickbooks (which takes a minute), you are able to go into their system and get a free business credit report for a company (a $109 value). You can use this to check on your own Paydex score or to check on a potential customer.

Benefits to your customers:

1. You can help your customers build a good credit score by reporting your Quickbooks information once a month through this system.
2. The program is strictly voluntary, so you don't have to do it every month. You will also receive an automatic email reminder.

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

• 1 Loan
• 3 Business Credit Cards
• 5 Vendors

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.