But, the reality is that many people, and many small business owners, don’t have excellent credit. New small businesses especially may have poor credit, or a limited credit history entirely. This can present significant obstacles when trying to obtain small business funding.
However, in many cases, short term business loans don’t have such stringent credit requirements as compared to other types of small business loans.
Additionally, successfully taking out and repaying a short term small business loan can actually help your credit situation, making it easier to obtain small business funding in the future.
Learn more about your business credit score, and how a short term small business loan can help your business and improve your score in our guide below.
Understanding Your Business Credit Score
First, it’s important to have a basic understanding of what makes up your business credit score. It’s not dissimilar to a personal credit score, but the factors and considerations are somewhat different.
In the US, there are three primary credit bureaus for business credit scores: two that are the same as personal credit scores, Equifax and Experian, and one that only deals with businesses, Dun & Bradstreet.
All three of these bureaus consider the following information when determining your business credit score:
- Size or amount of credit history
- Payment/repayment history
- Mixture of credit and loan sources
- Credit utilization ratio
- Size of your company/revenue/etc.
- Public records of judgments, liens, fines, etc. against your company
- Industry-related risk factors
Several of these elements are beyond the control of small business owners.
However, others are controllable, and should be kept in mind as you manage your small business and seek small business funding options.
The size or amount of credit history is partially under your control, though newer businesses or those with a poor score may have limited credit available. Repayment history is exactly what it sounds like – your history of repayments.
If you consistently pay your minimums on time, your score will be better than if you miss payments or are frequently late. And of course, the mixture of credit and loan sources is within your control to some degree.
Having multiple types of credit in use, with good history and good standing on all of them, show you are a responsible business user of credit, and are more likely to lend to you.
How a Short Term Business Loan Can Help Your Credit Score
With all of the above in mind, let’s turn to how a short term small business loan can help your business, and help boost your credit score. For a start, most small businesses are in need of some kind of funding or financing.
Cash flow and working capital, along with sudden, unexpected expenses, are characteristic of the needs of small business funding.
Short term business loans can provide a decent amount of cash, and typically don’t have very lengthy or involved application processes. At the same time, this kind of short term funding for small business is accessible, even to businesses who haven’t been around for very long.
The minimum credit score requirements, time-in-business requirements, and revenue requirements are generally quite low, since the loan is designed to be paid back in short order.
The act of applying for and qualifying for a short term business loan is indicative that you are trying to responsibly use your credit and improve your business credit score. The repayments usually begin fairly soon after qualifying, and may be daily, weekly, or, rarer, monthly.
This means you’ll be building up a solid history of reliable repayments, thus boosting your credit score. What’s more, short term small business loans may be a different type of credit (or the only type of credit) to add to your report.
This can boost your mixture of credit and loan sources part of your score, as discussed above. At the same time, you benefit from having a source of capital that you can use right away for your short term business expenses.
You likely won’t see an immediate bump to your credit score, but over the life of the short term business loan, it will improve, provided you make the required payments on schedule.
Disadvantages of a Short Term Small Business Loan
Short term small business loans do have some downsides or disadvantages as well.
Obviously, if they are your only choice of credit option, and you are focused on using them to both pay expenses and improve your credit score, then that outweighs many of the disadvantages.
However, given additional choices, you may choose a different small business funding option.
In brief, the disadvantages of short term small business loans include:
- Higher interest rates than many longer-term loans.
This can be even higher still depending on the types of short term business loans you choose. Unsecured small business loans don’t require collateral, but usually come with a higher rate as a result.
- Short term business loans are, by definition, short, with repayment terms of as little as 3 months up to around 18 months in the extreme end.
This means there’s not a lot of time to repay the loan, and the daily, weekly, or monthly repayments are fairly high as a percentage of the total loan.
- The maximum borrowing amount tends to be lower on short term small business loans than on other types of small business funding.
Since the repayment terms are shorter, and the credit score, revenue, and time-in-business requirements much less stringent than other types of funding options.
Short Term Business Loans and Other Types of Small Business Funding from BizFly Funding
While short term small business loans are an excellent choice for improving your credit score, they are by no means the only option for short term funding for small business. They’re not even the only option for small business funding in general.
Indeed, there are several types of small business loans, along with lines of credit, merchant cash advances, and other products available.
One source that offers a full range of small business funding options is BizFly Funding. BizFly Funding is a non-bank lender, focused exclusively on serving the financial needs of small businesses in the US.
They offer an online application process, speedy and exceptional customer service, and can provide your funds in as little as 1 business day following loan approval.
