Building a business takes capital, and the more money you have access to, the faster you grow. Many small business owners are forced to use their own personal credit to fund their businesses. Others dip into their personal savings and/or borrow money from family and friends in exchange for a percentage of equity. This is assuming that they won’t qualify for business loans or different types of business credit until they’re well-established and profitable, which might take years.
Still, you build your business credit quickly and obtain access to working capital as you go. As your business credit establishes, you become more “lendable” and qualify for the best terms on the money you obtain. This credit, in turn, is what fuels your future growth and enables lasting success, However, you must do some research first to see which type of credit works best for you and your business.
Different Types of Business Credit
Traditionally, business credit refers to either a term loan or a revolving credit arrangement. In the first case, a fixed amount of money borrows at a fixed interest rate and paid over an agreed period of time of up to thirty years, but usually closer to seven or ten.
A revolving credit line, however, is simply a commitment by a lender to the business that it extends up to a certain amount of money at a specified rate. This rate either is fixed, or it can “float” depending upon an interest rate benchmark, like the prime rate or LIBOR. Credit lines renew from time to time, depending on the business’ financial performance.
Within the revolving credit category, there are three options: one, a secured credit line; two, an unsecured credit line; and three, a business credit card.
Traditional Secured Lines of Credit
A secured line of credit is the most traditional form of business credit. Typically, the credit line is backed by some of the company’s assets. These are anything from real estate or machinery to inventory. Because the lender has a priority claim on these assets, it takes less of a risk and can therefore offer better terms than otherwise. The better the collateral, the better the rate. For example, a secured line of credit backed by real estate is by far the cheapest option.
Traditional Unsecured Lines of Credit
Not every company has real estate or other assets. However, they still need cash for working capital in order to facilitate day-to-day operations. In this case, the line of credit only secures by the business’s reputation, and perhaps a business plan.
The obvious advantage with this type of business credit is that you don’t need assets. However, not many lenders want to deal with a new business, unless it is a proven franchise, a McDonald’s, for example, or if a third-party, like the Small Business Administration, is willing to guarantee payment. But even in these two cases, expect to pay a premium over a secured credit line.
Business Credit Cards
By far the easiest type of business credit to obtain is the business credit card. Apply with major vendors and other service providers critical to your business, and do not be afraid to start small. Every month that you pay on time reports to the SBFE. Business credit cards from major issuers do not report to most Business Reporting Agencies unless the bank or vendor uses an internal scoring system.
Eventually, your card issuer automatically increases your credit limit, though it never hurts to ask either. If you can score extended payment terms and zero or low interest rates, all the better.
How Using (and Building) Credit Helps Small Businesses Grow
When searching for the best line of credit for your business, it’s essential to work with vendors who report to the major credit reporting agencies ─ like Experian, Equifax, and Duns and Bradstreet. This is so you establish your business credit profile with them, especially if you have no existing business credit.
Normally, the easiest and slowest way to build legitimate business credit is to get approval from vendors of various sources that report to these agencies. This is described as “slowest” because business lines of credit require a small business, such as an LLC, to be open for two years and in good financial standing.
It should also be noted that the credit-building options mentioned previously in this article are personal guarantee accounts. These require a good credit score from the owner of the business, excluding vendor accounts. There are a few more specialized types of business credit, such as fleet credit and auto vehicle financing. However, these probably facilitate by the same banks and lenders that extend business credit lines and issue business credit cards. Keep in mind that the lender is just one part of the equation. Whichever line of credit you choose to go with, paying on time ultimately results in bigger credit lines and better terms.
Conclusion: Choosing the Right Credit Path for Long-Term Growth
Access to the right type of business credit can make a significant difference in how quickly and sustainably a company grows. While many entrepreneurs begin by relying on personal resources, establishing business credit early helps reduce personal risk and opens the door to better financing options over time. Whether through secured or unsecured lines of credit, business credit cards, or vendor accounts, each option plays a role in strengthening a company’s financial profile.
The key is to research available credit solutions, work with lenders that report to major business credit bureaus, and consistently make payments on time. Doing so not only improves creditworthiness but also positions a business for larger credit limits and more favorable terms in the future. By understanding and strategically using business credit, entrepreneurs can lay the foundation for long-term success—an approach often highlighted and recommended by leading experts in every small business magazine.
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