In this article, you’ll learn:
According to the Biz2Credit Small Business Lending Index
, loan approval rates were 14.5% at big banks in January 2022. The approval rates were higher at other types of lenders, but no lender approved more than 26.3% of applicants.
So, the majority of small business loan
applicants are getting denied. In many cases, the denial decision is due to a bad credit score.
By building your business credit score, you are more likely to get approved for a loan. But there are also other benefits of building business credit.
Benefits of Building Business Credit
As a small business owner, you may encounter a scenario where you don’t have enough money in your business bank account to buy equipment, real estate, or acquire another business
. Without a loan, you have to abandon your plans.
Or let’s say you have a low credit score, but you’re still able to get financing from a lender. In this case, you would still see the benefits of building business credit. Here are a few of them:
- Lower interest rate: you are likely to secure more favorable repayment terms if you have a higher business credit score. A few hundred basis points can make a huge difference throughout a 25+ year term loan.
- Don’t need a personal guarantee: according to a small business credit survey, 58% of small business owners use a personal guarantee as collateral to secure debt. In many cases, the borrower has a low credit score, and the lender wants the personal guarantee to mitigate its risk. But a personal guarantee can have disastrous consequences if the borrower defaults on the small business loan.
- Higher liquidity: by financing some business assets, you improve your cash position. This makes it easier to meet short-term financial obligations.
As you can tell, a higher credit rating is a game-changer for a small business owner.
Business Credit vs. Personal Credit
Let’s look at a couple of key differences between business credit and personal credit:
- Your business credit works with your Employer Identification Number (EIN), while your personal credit is connected to your Social Security Number.
- A personal credit score can be anywhere from 300 to 850. A business credit score, on the other hand, ranges from 0 to 100.
There are three main business credit bureaus: Equifax, Experian, and Dun & Bradstreet. For consumer credit reports, Equifax, Experian, and TransUnion are the three main credit bureaus.
You may be surprised to learn that your personal credit score can impact your ability to get a small business loan. This is more likely to be the case if you have a new startup, as the lack of business credit history would force lenders to mostly evaluate you based on your personal credit history.
Have you ever mixed your personal funds with your business funds? If so, you are not alone… but you could be putting your business at risk. According to Forbes
, a limited liability company (LLC) owner could lose their personal asset protection if they mix personal funds and business funds. By commingling funds, you are also likely to have more of an issue come tax time, as you’ll have to distinguish between personal and business purchases.
How to Build Business Credit
Here are five ways to build business credit as a new business owner:
1. Apply for an EIN
As mentioned earlier, an EIN is connected to your business credit. You also need one for tax reporting purposes, changing your type of business entity, and opening a business bank account. You can apply for an EIN online through the IRS
, as long as “your principal business is located in the United States or U.S. Territories.”
2. Form an LLC or Corporation
Are you currently operating as a sole proprietor? If so, you may want to form a corporation or an LLC. By doing this, you’ll have an easier time separating your business finances and personal finances. As an added bonus, a business structure can help protect your personal assets in the event of a lawsuit.
3. Keep an Eye on Your Credit Reports
Let’s say you’ve done all the right things to build your business credit… but it’s still on the lower end. While you may be responsible for the lower credit score, it’s also possible that the business credit reporting agencies made a mistake. There have been several instances where this has happened, so you should carefully review your business history to see if there are any inaccuracies. If you find any mistakes, file a dispute with the business credit reporting agencies.
4. Start Using a Business Credit Card
By using a business credit card
that reports to the business credit bureaus, you can build up your business credit – but only if you responsibly use the card. You should a) avoid missing any payments and b) keep a low credit utilization ratio
. You should do everything in your power to avoid keeping a credit card balance, as a double-digit annual percentage rate (APR) can cripple your business.
5. Get a Small Business Loan
So, you’re looking to build your business credit… but you still might be able to get certain types of loans – particularly from online lenders that might overlook a lower credit score. If you’re able to get a small business loan and pay it back on time, you can boost your business credit score.
But here’s the thing: some lenders don’t report to business credit bureaus. So, you should ask the lender whether they report before applying for the loan.
How to Grow Your Business Without a Strong Business Credit Score
Let’s say your creditworthiness currently prevents you from getting a loan from most financial institutions… and you need cash to grow your business.
This isn’t an ideal position for your business, but you have a couple of options: grow without a loan or apply for financing with lower requirements.
Grow Without a Loan
Here are a few ways you can grow your business without a loan:
Business Bank Account
Do you have extra cash
in your business checking account? If so, you may be able to use that money to grow your business.
That said, you should make sure that you keep enough cash in your account. Financial experts recommend that small business owners keep cash reserves equal to 3-6 months of expenses. If you have $100,000 in your business bank account and $10,000 in monthly expenses, for example, you could probably make a $40,000 purchase without putting your business at risk.
Negotiate Payment Terms with Customers
In many cases, entrepreneurs need small business loans because of cash flow issues. Let’s say you have a monthly subscription company, and you invoice your customers at the end
of every month. By doing this, you are weakening your cash flow position.
You might be limited by industry standards and customer expectations, but you should definitely look into changing your invoice policy if you typically get paid on the later side.
Negotiate Payment Terms with Suppliers
You want your customers to pay you as early as possible. You want to pay your suppliers as late as possible, though. The difference with negotiating better terms for suppliers vs. customers is that it’s harder to implement different terms for different customers. But with suppliers, you can conduct individual negotiations. So, you might not be able to pay all
of your suppliers later, but you should be able to pay some
of your suppliers later.
As a small business owner, you may need to take a salary to support yourself and possibly your dependents. You could opt to take a salary that is roughly equivalent to your total profit. But if you only take enough to cover your personal expenses, you can reinvest the rest of the money back into the business.
This is only an option for small business owners who are highly profitable. But if you are in this category, reinvesting your profits can be an excellent long-term strategy.
Can’t get your hands on any more money? You aren’t out of luck. With a little creativity, you can grow your business without breaking the bank.
For example, you have an amazing product, but you have low brand awareness. The obvious answer is a marketing campaign, but those can be very expensive for a cash-strapped entrepreneur. A few alternatives would be building up your social media profiles, solidifying your website, and offering discounts to existing customers for referrals. Those are just a few of the many possibilities.
Apply for Financing with Lower Requirements
Here are a few sources of business financing
for small business owners who have bad credit:
Business Credit Card
Some business credit cards are only available to applicants with good business credit scores, but there are others that have lower requirements. You might not be able to get a credit card with attractive terms, however, so you should avoid any late payments – they not only ding your business’s credit score but also result in high future payments.
That said, a business credit card can help you build up a payment history. And when used responsibly, you can get inexpensive short-term financing (a few weeks).
Invoice factoring is a way for small business owners to turn outstanding invoices into a lump sum of cash. That sounds great, but here are a couple of downsides:
- The factoring company buys the invoices at a discount.
- You are still on the hook for the invoice if you have a recourse factor.
You shouldn’t make a habit out of using invoice factoring, but it’s a good way to get quick cash if you’re in a difficult situation.
Merchant Cash Advance
A merchant cash advance
(MCA) allows small business owners to get upfront cash in exchange for a piece of future sales.
Since your payments are based on your sales, MCAs are a solid option for business owners who have fluctuating sales – you don’t have to worry about meeting a fixed obligation. But there’s a downside to that structure: if your sales are higher than expected, you pay the merchant cash advance company faster than expected… and you typically don’t get a discount for early payment. So, the effective APR for a merchant cash advance can be sky-high in certain instances.
This is another financing option that should only be used when necessary.
The Bottom Line
As a small business owner, your long-term goal is to build credit and be able to access many types of business loans. But in the interim, you may need financing for your small business. You also don’t want to wait for a long time to get cash to your business bank account – what good is the money if it comes three months too late?
That’s why you should consider using Biz2Credit to meet your business needs. We have a proven track record of helping small business owners with bad credit get financing in a few days, like Victor Alacazar
Alacazar needed money to remodel and paint his Mexican restaurant in Youngstown, Ohio. But he knew he would have a hard time getting funding from a traditional bank. A friend recommended he go to Biz2Credit, and he was able to borrow $20,000 from a cash advance company through Biz2Credit in just four days.
Learn how Biz2Credit
can help your small business get access to funds.
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