Can Taking Out a Business Loan Help Build Credit?
A strong credit history can unlock major doors for your business. With an outstanding credit score, you’ll have access to more flexible and affordable financing options, giving you even more control over when and how your business grows.
There are a number of ways to build up your credit—business credit cards and lines of credit, for instance—but today, let’s explore how to build your credit with a loan.
Build credit with a traditional loan
Traditional loans build your credit by showing credit bureaus you can be trusted to repay borrowed money in a timely, reliable fashion; traditional term loans allow you to borrow anywhere from $25,000 to $500,000, generally, which you’ll pay back over one to five years.
If your current credit score leaves something to be desired, a secured loan is likely your best option, as most unsecured loans require top-notch credit scores. Lenders offering a secured loan will require you to put up collateral when you borrow, meaning you’ll offer up business assets (real estate, inventory, etc.) that a lender could seize in the event you default.
Once you begin making payments toward your loan, those payments will be reported to credit bureaus and become part of your credit history.
Build credit with a credit-builder loan
If your credit score is weak and making it difficult to secure a traditional loan, you’re not out of luck. Credit-builder loans help business owners rebuild their credit in a way that both benefits the borrower and minimizes risk for the lender. They’re small—smaller than term loans—and typically offered by credit unions, community banks, and other local lending institutions.
When you secure a credit-builder loan, your lender won’t hand over the cash straightaway, as they would with a traditional loan. Instead, the borrowed amount gets stored in a savings account, which you will gradually gain access to as you repay the loan. During the repayment period, you’ll make payments to your lender using funds you already have on hand, which then get reported to credit bureaus. If you pay back your loan on time and in full, you’ll be given access to the cash in the savings account.
Other simple ways to build credit while paying off your debts
In addition to making timely payments toward your traditional or credit-builder loans, there are a few other ways you can ensure you’re building great credit:
- Make sure you’re on top of your other debts and bills, including utility bills and other monthly expenses, all of which can have an impact on your credit score. You may want to consider setting up automatic payments, if possible. If you’ve struggled to make payments on time in the past, but have an otherwise good track record with your lender, you can request a “good faith removal” and have records of your late payment cleared from your history.
- If you use credit cards or lines of credit, avoid borrowing at maximum too often. Maxing out means accumulating debt—something credit bureaus don’t like to see, even if you have every intention of paying off that credit card bill at the end of the month.
- Avoid opening multiple credit accounts at once, and don’t close paid-up accounts unless they sit completely unused and rack up annual fees. This will bolster the average age of your open accounts, making you appear to be a more experienced borrower in the eyes of credit bureaus.
- Continually check your credit report for errors. If you find a mistake, confirm with the lender that you are, in fact, in the clear, and then reach out to the credit bureau with any pertinent statements, receipts, and correspondence to have the debt stricken from your record.
Traditional lending institutions have a reputation for being wary of small businesses as borrowers. Strong credit will only help your case the next time you need a loan, and working with a traditional lender means more affordable financing, allowing you to keep your money where it really matters: with your growing business.
RELATED: How to Get a Business Loan If Your Credit's Not So Hot
