Build Business Credit Before Taking Out a Business Loan

Business credit can have a significant impact on your business’s operations as well as your business’s overall reputation and standing. Positive business credit can give you access to a better credit card interest rate as well as the ability to purchase products for your business without prepaying. However, those are just a few of the benefits. Business credit is important and can help navigate day to day business issues with greater ease and more flexibility and options. However, many may question what needs to be done to build good business credit as well as specific ways their business can benefit from it.

What Is Business Credit?

First of all, business credit must be defined to create a clear understanding of what it is. It differs from personal credit in that it reflects your business’s creditworthiness and not your personal credit. However, it functions similar to personal credit in that it allows you to operate your business and acquire products and services for your business without having to use cash for everything or pay upfront. Like personal credit, business credit allows you to acquire things and pay for them over time. This can be a huge benefit when it comes to keeping your shelves stocked and your tools and other business-related machines running properly.

The Step by Step Building Process

Understanding why establishing business credit is important and as well as understanding the benefits, puts you int he perfect position to move forward with clarity and confidence. IN essence, you have developed an understanding of how business credit can move your business to the next level. Once you have this understanding under your belt, take the first step. incorporate your business. Get your federal tax ID or EIN and open your business bank account. Go a step further and get a dedicated business phone number and open a business credit file. Apply for business credit cards and establish a line of credit with your suppliers and/or vendors. All of these steps promote your business and give you traction by giving you access to funds that will help you build and grow your business.

Establishing your business and seeking credit opportunities lets other related creditors, vendors, and suppliers know that you can be taken seriously and that you’re not a risk if you honor the terms of your agreement. These simple moves have the ability to elevate your business by giving you greater access to more funding as your credit grows and matures and is handles properly. You dont have to worry about digging into your pocket to get the funding you need when you use and handle your business credit responsibly.

Why Is It Important?

There are practical reasons for establishing business credit that can have something to do with your personal credit. Establishing business credit separates your business from your personal life legally, preventing possible harm that could come to you or your assets if something were to go wrong with your business. However, if you run a sole proprietorship or general ownership, the business and the owner are one and the same. This provides no protection for the owner’s personal credit or liability. If something bad happens to the business or concerns the business, a person’s personal life is affected as well. This is one reason why many business owners opt to form a limited liability corporation or LLC. An LLC provides protection for the business owner by separating the owner’s personal life from the business. However, the benefits of building business credit don’t end there. There are many.

Other Benefits…

The importance of building business credit can be looked at in other ways as well. If you have less than perfect personal credit or other blemishes that could negatively impact your business, forming an LLC protects your business from the scourges of your blemished credit. Also, building business credit also has the ability to create credible relationships with your vendors and suppliers, allowing you to use your credit and pay for supplies and products over time. Besides, good business credit can help you to qualify for better interest rates and terms with banks and lenders.

What Types of Things Hurt Business Credit?

When you are negligent with the credit that a lender extends you by missing payments, paying late, or not honoring the terms of your loan, this hurts your ability to secure good interest rates and unsecured loans. Quite logically, you hurt your business credit when you don’t honor the terms and conditions of your lender. If you are a sole proprietor, the financial moves you make in your personal life can vastly affect your business credit negatively.

If you co-sign on a car loan for Aunt Betty and she defaults on her payments, that can vastly affect your business credit score. Regardless of the reasons, it looks like you haven’t handled your credit well.  Furthermore, maxing out your credit cards or not using your credit at all, can also reflect poorly on your credit history. These are all negative scenarios that can negatively impact your business credit. Opening too many credit accounts can also impact your business credit negatively.

The ABC’s of Business Loans

The process of getting a business loan is similar to acquiring a personal loan. You determine your business needs and how much capital it would take to provide for them, then you shop around for the loan and terms that will be most agreeable to you. However, there are several questions you should consider and answer when it comes to determining whether or not you should take out a business loan. The most obvious question to ponder is if you truly need a business loan? However, this question is linked to several others that will yield a clear answer.

Why are You Taking Out a Business Loan?

Has your business outgrown its current space? Are you in need of new equipment? Do you need to establish business credit for the future? Are you failing to meet the demands of your customers? Are you a seasonal business that needs to stay ahead of the boom? These are all pertinent questions that you should consider. More than likely, if you answered yes to any of these questions, you could probably benefit from a business loan. If there is a clear need, this is usually enough evidence as proof that you may benefit from Taking Out a Business Loan.

When You Shouldn’t Take Out a Business Loan…

You should keep in mind that Taking Out a Business Loan is only a good idea if it will truly benefit your business. If you’re taking out loans to make ends meet and your business is already floundering, you’re behind on bills, and there’s not enough revenue to support your current operations, its probably not a good idea. In essence, you’re just digging a bigger hole for yourself. In scenarios like this, you’re not really helping your business, you’re just creating more debt.

What Types Of Business Loans Are Available?

There are a variety of different types of business loans that can meet your needs. However, it requires taking a good hard look at your business to determine what it truly needs to thrive and improve. For example, if your business is in need of updated machinery, there are loans for this. You can take out an equipment loan to purchase new machinery or equipment. This is a short term loan used for the express purpose of buying equipment. These loans are similar to installment loans in that you make equal monthly payments over the term of the loan. If you don’t have a lot of business credit, this type of loan can be beneficial in helping you build your business credit. With this type of loan, the machinery or equipment that you buy is the obvious collateral.

Other Business Loans…

However, you may need a loan to cover more than just new equipment. In fact, you may not need new equipment at all. Instead, you may need a variety of different things to meet your business needs. In situations like this, an installment loan may be one of the most viable options for you. If you are taking out a business loan, installment loans give you all the money you applied for upfront. It’s a general loan that can be used for any of your business needs. The payments and interest are pre-calculated and spread out over time into equal payments. The terms can vary, however. For some businesses, taking out a business loan is best approached by acquiring a line of credit. This is a common form of business credit for many new businesses as well as businesses that have been around for a while.

Line of Credit

Line of credit loans provides a lot of flexibility to businesses. They can be either short term or long term because business owners have the option to pay off the entire balance at the end of the month or pay it off over time. This is perhaps why it’s a popular loan for many businesses. This type of loan can be re-evaluated at the end of the year and possibly renewed if the terms were followed. Line of credit loans also tends to have low-interest rates which also make them attractive. Lenders look at this type of loan as low-risk which may be a reason for the low-interest rates.

Revolving Credit

Some businesses may want to consider taking out a business loan in the form of revolving credit. These loans are very similar to line of credit loans, however, they are actually more like credit cards. These loans work by refilling once you’ve made a payment. For example, if you’ve purchased a piece of equipment that only utilizes twenty percent of your revolving loan, once you pay that amount back in its entirety, you have essentially refilled your loan. In other words, you still have the initial loan amount available for use. This type of loan tends to have a higher interest rate than line of credit loans, but more versatility.

Commercial Real Estate Loans

Commercial real estate loans are very similar to equipment loans. However, they are used to acquire commercial property for your business instead of equipment. These loans are a smart choice for businesses that are interested in Taking Out a Business Loan for the express purpose of acquiring space to run their business. Lenders are often more prone to offer better interest rates for this type of loan because it’s hard to make off with the collateral when it’s real estate. Some businesses may find it necessary to acquire a loan to pay off other financial obligations. This is called an interim loan. Once you have paid off the debt owed for your business debt, like money owed to suppliers and contractors, the funds for this loan become available for use.


Microloans and 7(a) loans may also be needed as well. Business interested in Taking Out a Business Loan may be eligible for a microloan for up to fifty thousand dollars. These loans target small businesses and daycare centers. Disaster loans are also an option for businesses that are considering Taking Out a Business Loan. If you have experienced a loss as a business owner this type of loan can help you recoup.

The Small Business Association (SBA) and Unique Loans

Loans that fall under the Small Business Association are more difficult to be approved for. However, terms and interest rates tend to be highly favorable. However, business loans form direct lenders tend to be easier to qualify for. SBA loans are a smart place to shop for business loans because of the respect and positive terms and interest rates that they carry. Even if you don’t qualify, it’s a good idea to try. SBA also offers lines of credit for women and other minorities, franchise owners, doctors, and lawyers. Startup lines of credit are also available too.

Balloon loans are often a consideration for businesses that are considering Taking Out a Business Loan. Essentially, you pay the taxes on a monthly bases and the principal at the end of the loan. Hence the term, balloon loan. The largest payment occurs at the end of the loan. However, the payment schedule is usually agreed upon by you and the lender.

This type of loan is usually best suited for businesses that expect a huge return of revenue and have the means to pay off the principal of the loan in one lump sum. With this type of loan, lenders may require proof that your business will have the means to pay off the principal at the end of the loan.

Loan Language: Secured Versus Unsecured Business Loans

As discussed above, secured loans are loans where there is some form of collateral that functions as security for the lender. If you default on the loan, the lender has some form of payment to recoup their losses. These are usually the types of loans that business acquires initially until their credentials can justify a business being creditworthy enough for an unsecured loan or a loan without collateral.

Unsecured loans are a benefit or perk that businesses can work toward once they have displayed or shown their creditworthiness by making their payments on time and honoring the terms of the loan.

Do Business Loans Affect Personal Credit?

Business loans can affect your personal credit if you don’t have a limited liability corporation that separated your business credit from your personal credit. If you have a sole proprietorship or general ownership, the owner or owners and the business are as one. It’s in your best interest to separate the two. Separating your business from your personal credit by forming a limited liability corporation legally separates the owner or owners from his or her business.

What Steps Should a Business Take to Secure a Business Loan?

Any business owner can improve their chances of securing a business loan by doing a few simple things. Start by incorporating your business. This is a protective step for both your business and your personal assets. You should also get a federal tax ID if you haven’t done so already. This is referred to as an EIN number. In essence, this serves as a social security number for your business. You will need this important number to open a business bank account, file your taxes, and when dealing with some vendors. It’sd also a good idea to use your business bank account to pay for and conduct your business transactions. If you have a business credit card you should use your business bank account to pay your bill.

You should also get a business phone number and list it under your business name. In addition, it also helps to open a business credit profile with all three credit reporting agencies. All of these actions show lenders that you are a serious business. This looks good when it comes to Taking Out a Business Loan. If you can, establish a line of credit with your suppliers and vendors and ask them to report your payment history to all three credit agencies. This is a powerful move. Logically speaking, simply paying your bills on time is important and makes a huge statement. This is a simple move that reflects positively on your business credit.

How Do I Qualify For a Small Business Loan?

Where Can Businesses Apply For a Loan?

Business owners can apply for a business loan at a bank or credit union. These are the entities that typically provide these types of loans, although there are others. Business owners can also apply for a loan through the Small Business Association as well. SBA loans typically span from five thousand dollars to five million. The amount you can borrow is dependant on your business credit and your ability to pay the loan back. You can also look for a business loan from an online lender as well.

And you can even apply for an SBA backed loan from a bank or credit union, however, the application process is different. You will have to present proof that you are a good risk, even though SBA loans do have leniency. However, it should be noted in general, that qualifying for a business loan is more difficult than qualifying for a personal loan. However, begin with the end in mind. Know how much you want to borrow and why, and be prepared to support your requests with supporting information.

Applying for a Business Loan

Any business owner who plans on Taking Out a Business Loan should gather certain qualifying documents as proof of creditworthiness for a business loan. Of course, you will need personal identifying information, your business license, and a resume with your education, and other supportive information. You will also need financial statements from your business. The lender will indicate how far back these statements need to go. Any business credit history and personal credit history of any partners will need to be presented as well. Cash flow predictions and a guaranty form all of the business owners will also be a requirement.  You may also be asked to provide a business plan as well. However, the best solution is to be prepared for any document the lender may ask you to provide. Not all lenders ask for a business plan, but its best to have one.

The Nuts and Bolts

Know your why. Why do you need a business loan? What purpose will it serve? How will it help your business? Get clear on this. Secondly, decide on the amount you need to borrow. If you Know your why,  you can determine how much you truly need to borrow.  Dont be too modest with your request. Be realistic. How much do you truly need to borrow to accomplish your business goals? Ask for what you truly need, not less or too much more. If you’re too modest, you will fall short and fail to fully accomplish your business goals. However, if you’re too grandiose with your request, it may raise the eyebrows of lenders and cause them to question your business goals as well as your ability to pay the loan back.

Dont Be Caught Off Guard

Know your credit score and history. Dispute anything that needs disputing and have any errors removed from your report. This is a step that should be done before you apply for a business loan. Do your homework. Create a business plan. This is a road map of your business that lets lenders know what your business goals are. Keep in mind, all lenders won’t ask for a business plan. However, some will. A business plan will show your business intentions, operations, and market analysis. Lenders know what to look for when it comes to how to finance a business and which businesses are finance worthy.

Shop Around

As a business owner, you know how much money you need to borrow and why. This should help narrow your list of potential lenders. You’ll want to choose a lender with favorable interest rates. You’ll also want to look into the terms offered by different lenders. Payment schedules and options should be considered too. Ther are a wide variety of different lenders to choose from. Be sure to take your time and shop around to find the lender that’s going to best suit your needs.

Every lender will have their own way of doing things and the terms will reflect this. Keep your needs and the amount you want to borrow in mind and choose a lender that’s most compatible with your business goals. Taking Out a Business Loan or business finance is a serious matter that should be approached soberly. Do your homework when it comes to choosing the right lender. Shop business loans that make the most sense for your business. And contact us to help you. Loanry connects you with reputable lenders.

Important Documents

Lenders will want to see your financials. A business plan is a concrete summary of your business, however, lenders will want to see cold hard numbers as well. You will need to show three years’ worth of tax returns, cash flow statements, profit and loss statements, balance sheets, business financial statements, and projected financial statements.

This creates a clear picture of your business, both past, and present, and gives lenders an idea of how well your business will likely do in the future. All these documents help greatly when it comes to risk assessment. once you have everything in front of you, fill out your loan application. Make sure you do your research when it comes to what documents lenders need for a business loan. If you gather everything in time, you will go through the entire process much quicker.

Was Your Application Rejected? Dont Worry…

Rejection is a part of life. However, a lot can be learned from it. If your application for a business loan is rejected, try to figure out why. Most lenders will provide some information on why your loan application wasn’t approved. However, the reasons may be many. You may have too much debt or the industry you’re pursuing a loan for may be considered too risky. Market trends may even be a reason why your loan application was rejected. However, it still behooves you to know the possible reasons why your loan application was rejected. Once you find out the reason, you have the opportunity to rectify the situation so that your next application has a better chance of being successful.

Final Thoughts

Many businesses feel that a business loan would greatly enhance their business functions and overall operations. There are a wide variety of different kinds of business loans available to meet the many needs and circumstances you may be experiencing as a business owner. However, your business’s creditworthiness is a fundamental precursor when it comes to being approved for a business loan. Many factors can negatively impact your business credit, just as there are many factors that add to the creditworthiness of your business. Take the steps needed to put your business in the position to get the funding it needs. This requires taking a sober look at your business and determining whether or not you truly need a loan, why you need a loan, and how much you should borrow.