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Eligible for an Upgrade? How to Graduate to a Better Loan Product Over Time

Emily Suess

Emily Suess is a freelance blogger and copywriter specializing in technology and small business.
Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.

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.

What is a Loan Upgrade?

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 Benefits of Smaller Loans

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.

Become an Ideal Borrower

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:

  • Pay small loans off in a timely manner.  This will help you establish a solid repayment history and improve your credit score.
  • Pad your bank balance while you work to pay down the initial loan. Your average bank balance has a huge impact on your creditworthiness in the eyes of lenders.
  • Watch as your credit score improves, and periodically check on your score to make sure no errors are being reported. Errors show up on credit reports more than you’d think—and they can have a significant impact on your credit score. An easy way to bring up your score is to flag any errors on your credit report.
  • Stay in business. Seems obvious, right? But the longer you are in business, the less risk you present to lenders. Time itself is one way to graduate.
  • Avoid the red flags of risk—like net losses, account overdrafts, late payments, and slow accounts receivable turnover.
  • Be careful not to violate the terms of your current loan. This might mean not using a line of credit for unqualified purchases or remembering not to take on new debts.
  • Deliver your required financial statements on or before their due date.
  • Prove that you’re keeping up with industry trends and news that show you’re prepared to make difficult decisions about the future of your business.

Shop Around for the Best Loan Options

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.

Emily Suess

Emily Suess is a freelance blogger and copywriter specializing in technology and small business.