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Your Funding Toolkit

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. www.annualcreditreport.com 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? The Orange County Small Business Development Center'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.
  • 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.
  • 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 booklet has a free 11-step method to establish good business credit in 6 months and excellent business credit in 2 years. Click here to download their Workbook: Building a Positive Business Credit Profile. (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