If you’re a new small business owner shopping around for small business funding, you might be discouraged by the loan offers you get when you’re first starting out.
You might be disappointed to find out that you couldn’t borrow as much as you wanted, or you may wonder why you are being quoted higher interest rates than the ones being advertised.
Don’t let any of this discourage you from building your company with a small business loan. Smaller loans with less favorable terms can become great stepping stones to future loan upgrades that give your business more borrowing power at a smaller cost of capital.
Sound like a good deal? Well, here’s how you can graduate to a better loan product down the line.
When you upgrade to better business financing, you’re really just securing a new loan with better terms. The new loan might be opened as you pay off a smaller loan or even offered concurrently with a previous loan.
You could also upgrade to a better loan product as a part of the loan renewal process with your small business lender—usually after you’ve been in good standing with your current loan payments for a minimum of about 6 months.
The first thing to remember when you don’t get the loan you want is that there are still benefits to accepting smaller loans or loans with higher interest rates when you really need the financing.
First, the loan itself will give you the money you need to move forward with your business goals. When your sales and revenue increase, you can roll those profits back into the business. That means you’ll have more money to work with when it’s time to add products or services, enhance your marketing campaign, or complete any number of goals you’ve included as part of your business plan.
Second, with smaller loans your financial obligation is, obviously, smaller. So if something goes wrong, you won’t suddenly find yourself on the hook for an impossibly large amount of money.
Lastly, small loans are the perfect opportunity to build up your reputation as a borrower. If you’re practicing good borrowing habits—paying on time and in full—you’ll build your business credit score. Your credit score is a key indicator of your reliability as a borrower, and a lack of a strong credit history might be why you fell into a shorter-term, higher-cost loan in the first place. But with a proven track record paying back the smaller loan, you’re much more likely to secure a loan upgrade somewhere down the road.
Use smaller loans to transform yourself into the ideal borrower by eliminating risk factors that make lenders shy away from your profile.
Then, when it’s time to upgrade, lenders will offer more competitive loan terms in order to earn your business.
How do you become the ideal borrower? Well, here are a few steps you can take to build your reputation:
The final step to saving money with a loan upgrade is being a diligent consumer.
Once you’ve built up your credit score and paid down a smaller loan, you’ll have many advantages. Perhaps the most important of these is that you will no longer feel like you’re at the mercy of these lenders.
You’ll have more confidence and negotiating power, meaning that you don’t have to accept the first lender that says yes. Take your time and compare the terms of every offer to get the deal that works best for you.