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Work it Step-by-Step to Get a Better Business Loan Smaller business loans are great stepping stones toward bigger, less-expensive financing in the future.

By Jared Hecht

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Rob Daly | Getty Images

If you're a new business owner looking to take out a loan, you might be disappointed by the offers on the table -- especially if your credit is less than spotless. However, sometimes taking on a more expensive loan than you'd hoped for is a necessary evil to grow (or launch) your business. The smaller loans you qualify for now can lead to larger, less expensive loans in the future.

Related: 5 Tips to Improve Your Odds of Getting a Small-Business Loan

How can you graduate to a better business loan down the road? Here's your step-by-step guide to finding lower-cost financing that fits your needs.

Step 1: Use your current loan to become an ideal borrower.

The loan you qualify for now will not only help you grow your business but also can position you as an ideal borrower in a future lender's eyes. Of course, that depends on your using the loan responsibly.

If your credit score or short time in business precluded you from better terms, use this first, more-expensive loan to build up a history of good habits.

Stay in business.

It's obvious but crucial. The longer you remain in business, the less risk you pose to lenders. A new or young business hasn't yet been tested. A more established company has proven it can withstand the regular ups and downs of its industry and the market environment.

Related: Five Ways to Build Business Credit

Pay on time.

This may seem obvious, but for some borrowers, paying on time is tough. Every time you make a loan payment exactly when it's due (or before, if you can swing it), you're establishing a track record of on-time payments. This is the most important step you can take toward building up your credit score.

Build your bank balance.

If possible, try to pad your bank balance as you use and pay off your first loan. Your average bank balance has a huge impact on the types of financing you'll qualify for later on.

Monitor your credit score.

As you make your business-loan repayments on time and in full, you should start seeing your credit score increase as you build on good behavior. Be sure to monitor this progress so you'll be aware of any errors on your credit report -- it happens more often than you'd think. If you uncover an error, report it. Mistakes here can seriously hurt your credit score and limit your options in the future.

Related: Applying for a Business Loan? Make Sure Your Personal Information Is Protected.

Avoid risk indicators.

Certain things are bright red flags that will prevent you from working with premium lenders. Steer clear of net losses, account overdrafts, late payments and slow accounts-receivable turnover.

Stay within the terms of your agreement.

Beyond making your payments on time each cycle, make sure you stay within the terms of your initial loan agreement. Don't take on new debts while the loan is still in service, and never use the capital for unqualified purchases. Read your loan agreement in full before you sign on the dotted line.

Step 2: Know when you're ready to graduate or refinance.

If you've used your current loan to become the best borrower you can be, you might be ready to graduate into a better, bigger business loan product. Fully paying off your first note is an easy indication, of course. Building your credit in that way means you'll likely qualify for better finance products than you did for your first go-round.

But you might be able to get a better loan even if you still have an outstanding loan amount. Refinancing your loan can help you negotiate more favorable terms. Here's how.

Choose your timing wisely.

Are you paying too much toward expensive interest? Have you elevated your credit score as your business continues operating over a longer time frame? If the answer to at least one of these is yes, you should be able to get a better loan over the long term if you refinance now.

Define your financial goals.

Before you go shopping for your refinance, be clear on what type of loan you hope to secure. You want to bring down your loan cost and make repayments more comfortable for your business. But there are different ways to reach that same outcome. You might reduce your monthly payments, lower your loan's total annual percentage rate (APR) or select a more convenient payment schedule.

Related: 8 Financial Tips for Entrepreneurs Launching a Startup

Work with the right lender.

If you've made good strides with your credit score and have your business financials in place, you can afford to be a little picky as you choose your lender. Consider each prospective lender's reputation and overall value. Ask the basic questions you would with any business loan. This enables you to gain insight on how you'll pay back your current loan with the refinancing solution, what you might need to pledge as collateral, what happens if you pay the loan off early and so on.

This level of scrutiny will give you a sense of whether a lender's product really will help you achieve your business' financial goals. Don't forget about the Small Business Administration, either: An SBA loan often will be your safest bet because it typically packages some of the best refinancing conditions on the market.

Related: SBA Loans: A Primer

Step 3: Use your new loan responsibly.

This sounds familiar, and it should. It's time to go back to Step 1: Be a responsible borrower and use the loan to grow your business.

It's a gradual process. Each time you take out a financing product and show discipline, you'll remove barriers that future lenders might interpret as risk factors – and an excuse to say no.

Jared Hecht

Co-founder and CEO, Fundera

Jared is the CEO of Fundera, an online marketplace that matches small business owners to the best possible lender. Prior to Fundera, Jared co-founded GroupMe, a group messaging service that in August 2011 was acquired by Skype, which was subsequently acquired by Microsoft in October 2011. He currently serves on the Advisory Board of the Columbia University Entrepreneurship Organization and is an investor and advisor to startups such as Codecademy, SmartThings and TransferWise.

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