As you grow your business from a fledgling startup to an established enterprise, it’s important to build business credit. Entrepreneurs have traditionally done this by using business credit cards, but taking out online small-business loans can also do the trick. They’re more expensive than traditional loans, but they can still be a steppingstone to bank financing — especially if you have bad credit.
“This is an opportunity to climb up the credit ladder,” says Tom Sullivan, executive director of the Coalition for Responsible Business Finance, a new advocacy group for alternative small-business financing options.
This is only true if your lender reports to business credit bureaus, and not all online small-business lenders do. If yours doesn’t, your credit won’t be affected either way. If building your business credit is a priority, get a loan from a lender that reports to one of the three major business credit bureaus: Experian, Equifax or Dun & Bradstreet.
Why building business credit matters
A solid business credit score is proof that you’re a responsible business borrower. Having one can help you qualify for business credit cards, lower-interest loans and better terms from your vendors. Forty-five percent of small-business borrowers who are denied credit – such as a loan or credit card – are denied because of their credit scores, according to a 2014 report by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia.
Once you have a business credit score, you won’t have to rely on your personal credit to get small-business loans. If you need to brush up on your business credit score knowledge, check out Business Credit Score 101.
If you have an online small-business loan from a lender that reports to a business credit bureau, it will affect your business credit score. Many online small-business lenders do report, including OnDeck, Lending Club, Funding Circle, Fundation, Kabbage and BlueVine. Prosper, which offers personal loans for business use, reports to Experian and TransUnion, two of the major personal credit bureaus.
How online small-business loans can build your credit
In general, making on-time payments to the lenders mentioned above will have a positive effect on your business credit score. But business credit scores are much less streamlined than personal credit scores. Each business credit bureau has a different formula for calculating scores, and different lenders report different types of data, says Gavin Harding, a senior business consultant at Experian.
The best way to ensure that your small-business loan helps build your credit score is to understand your loan terms and stick to them, Harding says. That means consistently paying the correct amount on time. If your lender automatically deducts payments from you bank account, as many online lenders do, make sure you always have sufficient funds in your account.
How online small-business loans can hurt your credit
If you have a small-business loan from an online lender that reports to a credit bureau and you miss payments or pay late, your credit score will get dinged. This will make it more difficult to get another loan in the future.
Online lenders take on more risk than banks by lending to a wider spectrum of borrowers. There’s a higher risk that their borrowers will default, or fail to repay, Harding says. To avoid defaulting, learn what to do when you can’t make payments on your online small-business loan.
Online Small-Business Lenders and the Credit Bureaus to Which They Report
| Lender | Credit bureau | ||||
|---|---|---|---|---|---|
| Equifax (Business) | Experian (Business) | Paynet (Business) | Experian (Personal) | Transunion (Personal) | |
| Funding Circle | X | ||||
| BlueVine | X | ||||
| OnDeck | X | X | X | ||
| Prosper | X | X | |||
Do report, but declined to name specific bureaus: Lending Club, Fundation, Kabbage
Don’t report: SmartBiz, Lighter Capital, Fundbox, Dealstruck
The bottom line
Online small-business loans can help build your business credit if your lender reports to a business credit bureau. But not all lenders do. If you’re trying to build your credit, get a loan from a lender that does — and be sure to make your payments on time.
Find and compare small-business loans
If you’re looking for a loan, check out NerdWallet’s small-business loans page. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business.
For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email: teddy@nerdwallet.com. Twitter: @teddynykiel.
Image via iStock.
from NerdWallet Credit Card Blog
http://www.nerdwallet.com/blog/small-business/how-to-build-business-credit-small-business-loans/
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