Establishing Credit is Key to Obtaining a Small Business Loan

A Home Business Article Contributed by Cassandra l. Keller

Establishing Credit is Key to Obtaining a Small Business Loan

You may have a great small business idea, but no matter how badly you want to start your own venture, you will most likely need to take out a loan to cover start-up costs.

Every lender looks at certain factors regarding you and your business prior to approving a small loan. One of those factors is your credit history. Credit history is a daily part of life. From renting an apartment to purchasing cell phone service, your credit is always part of the approval process. Obtaining a small business loan is no different. So, as you can imagine, being familiar with credit dos and don'ts can be vital in the process of seeking a loan.

The following are a few tips on what to do and what not to do when it comes to grooming your credit for a small business loan.

Establish Credit Prior to Seeking a Small Business Loan

If you haven't already, you need to establish some credit. A good way to start this process is by opening a bank account. While this will not appear on your credit, you will need a bank account number for your credit applications.

Next, apply for a credit card. Your objective here is to not be denied credit, so be sure and only apply for cards whose requirements you will most likely meet. It is usually easier to obtain a gas credit card or a department store credit card than a bank-issued card such as Visa or MasterCard.

Prior to applying, make sure the creditor reports account activity to the credit bureaus to ensure your work isn't in vain.

Once you have a credit card, charge purchase and make payments on time. After three months, you can then apply for a MasterCard, Visa, Discover or American Express with more luck of not being denied.

Next, create a spending plan. You want to make sure you are able to pay off the balance on the items you plan to purchase - within the month of purchase is best.

You may also consider apply for a secured card. These cards have credit limits based on a deposit provided by you. You can use the card just like a credit card.

What to do If You are Denied Credit and Still Want to Pursue a Small Business Loan

If you are denied credit you need to find out why. Reasons can vary from employment, credit history and income. You can also request a free copy of your credit report to see if there is erroneous data on it. If so, have it corrected.

Do Not Jeopardize Your Credit Rating before Applying for a Small Business Loan

While establishing your credit is important, it is equally important to be aware of and abide by rules that might jeopardize it.

Do not overdraw your bank account. You may face fees if you do and this could damage a good reference.

Make payments to your creditor(s) on time. This will ensure you don't damage your credit rating.

Do not lend out your credit card, debit card or let anyone else have access to your bank account. This includes not giving your credit card number to anyone over the phone or Internet unless you initiated the transaction.

Avoid cash advances. You will have to pay up-front fees and they can be very expensive.