Most entrepreneurs of today regard having a good credit rating as an important aspect of doing business. It’s believed to be crucial in aiding businesses to make several financial decisions such as expanding the business in terms of office space, equipment, and inventory and gaining added capital and funding.
However, not every company has a good business credit standing. On the other hand, budding startups may find it hard to meet loan requirements when they’re only a couple of months or a few years in operation. They may not even have enough credit lines or substantial payment history to establish their creditworthiness to obtain traditional loan offerings.
The same thing goes for ventures who are trying to get back up after serious financial challenges; resulting in bad credit scores due to late or missed payments. Like startups, they may face loan rejections or get slapped with higher interests because of their perceived financial risk.
What Is A Credit Builder Business Loan
While there are several remedies to improve business credit score, there’s one that can help new businesses and struggling companies get back on their feet financially without too much of a struggle—business credit builder loans.
Typically offered by brick-and-mortar and online financial institutions such as creditstrong.com and the like, business credit builder loans are different from other financing products because it acts as a prepaid loan. Business owners can take out a loan and pay in monthly installments while the bank or credit union stores it in a business account. The applied loan amount is only made available to the loan holder when the terms have been met and the loan is fully paid.
Credit Builder Business Loan Advantages
This type of loan is often unheard of by many, but it can have various advantages to a startup or a struggling business. Read on to learn more about their perceived benefits that you may not know about.
1. Positive Influence On Business Credit Score
It’s believed that business credit scores largely depend on a business’s history. It measures the company’s duration and considers it as an indication of its success despite market or industry changes. Commercial credit scores are also dependent on repayment history as a clear sign of the business’ financial accountability.
A credit builder business loan is said to influence business credit score in two ways. One, it initiates a company’s credit history to build up its credit rating. And two, as you make prompt repayments, the credit builder forwards it to respective bureaus which then reflects on your score’s improvement.
2. Increases Creditworthiness And Financial Standing
Apart from increasing business credit scores, this type of business loan also has a positive impact on prospective lenders and business partners. Since commercial credit ratings are available for everyone to see, a good repayment record can help convince investors that your company is financially capable of paying obligations on time.
A good financial standing also opens you to more doors to opportunities in the future. You can get approved for higher loan amounts, enjoy lower interests, or even obtain additional investments and funding with an outstanding credit builder business loan.
3. Enhances Financial Literacy
Another advantage of taking out a credit-builder business loan is it helps raise financial literacy and credit awareness. Not only do you save up additional capital for business plans to be accessed in the future, but you can also learn how to handle your business’ finances better for you to not miss out on payment deadlines.
There are many additional services and resources out there like online sites such as Digital Honey that may help you increase your business know-how when it comes to money matters to make fulfilling monthly obligations easier.
4. Easily Accessible
Credit builder business loans are readily accessible for regular business owners. You can apply for one in your preferred bank or a local credit union.
There are also reputable online lending platforms that offer this service.
Make sure to check prior reviews from fellow entrepreneurs to know how a certain financial company handles such loans. Feel free to inquire about its availability and the requirements needed for approval. Your assigned lender can work things out for you to help you build your credit score and eventually gain financial freedom.
Disadvantages Of A Credit Builder Business Loan
Getting a credit builder business loan can be good for your business if you want to increase your credit score and help build or repair your formerly tarnished financial reputation. However, there are some minor drawbacks to this type of business loan.
1. Upfront Cost
Unlike other types of loans where the lender gives you a lump sum, credit builder loans are different. They require owners to pay an amount upfront and then make payments based on agreed terms before they receive the loan in full. This can be disheartening to businesses who are in desperate need of funding since they would need to reduce their capital in order to accommodate this type of loan.
2. Late Payments Are A No-Go
Another drawback of a credit builder loan is the need to make timely payments. Since your progress is reported directly to top credit bureaus, any infractions may reflect on your report and affect your journey to achieving a higher credit score.
You would need to be consistent with your prompt payments to raise your creditworthiness in the eyes of the credit bureaus. This type of loan works best when your business assets far outweigh your debts otherwise your credit score will continue to plunge further.
3. Funds Are Inaccessible Until The Loan Is Fully Paid
Credit builder business loans are designed with the future in mind. When you take out this type of financial obligation, you’ll have to wait for it to mature before you’re granted access to the funds. The period depends on the loan’s originator and the agreed terms and conditions. Some would need to wait for a year or longer before they can use the money for their business. While this can seem like a short time, this may leave some businesses on the red if they need cash to cover unforeseen expenses.
Business loans can help companies establish themselves as responsible borrowers and credible partners. Startups and even businesses struggling to get back on track can find it helpful if they avail of credit builder business loans.
Most banks, credit unions, and even online lenders nationwide offer this product to their clients to aid them to establish their credit history. Making prompt payments allows them to establish a good repayment status that enhances their business credit score and establishes their positive standing to prospective business partners.
However, there are some disadvantages to taking out this type of loan. Business owners would need to keep up with payments or else risk lowering their commercial credit score even further. On the same line, a credit builder business loan makes much-needed funds inaccessible which makes it a risky venture for businesses with limited wiggle room for funding.
As in all business financial decisions, it’s always best to consider all aspects especially when it involves money, business reputation, and good standing. The same is true in obtaining any type of loan. You should know the pros and cons of a credit builder business loan to determine if it’ll help propel your startup venture, aid your business bounce back from a crippling financial setback or if it comes with additional risks to your business.
Creating a balance between immediate needs of boosting credit scores and long-term credibility and trustworthiness will ultimately determine if a credit builder business loan is right for your business’ current needs and financial situation.