What is a Business Credit Builder Loan?
Small business owners often need to borrow money to accomplish their goals but lack the credit history to qualify for financing. Fortunately, business credit builder loans can help you build business credit from scratch.
What is a Business Credit Builder Loan?
A business credit builder loan is a product designed to help small business owners improve their business credit scores with installment payments. It’s one of the few financial tradelines you can qualify for without a good business credit history.
The structure of a business credit builder loan is the opposite of a traditional small business loan. You don’t receive any proceeds when you open the account. Instead, the issuer releases the loan funds after you pay off the balance.
Because they don’t pay you until after the loan term, the issuer doesn’t have to worry about you defaulting. As a result, you don’t have to undergo a credit check to get a credit builder loan and can qualify without a good credit score.
Another effect of credit builder loans not paying out until after the end of the loan term is that they’re worthless for financing your business. If you’re hoping to borrow money, they’re not the product for you.
However, that doesn’t take away from their ability to help you build business credit. Your account issuer should report your account as a financial tradeline when you sign up and share your payment activities monthly during the loan term.
Let’s look at an example to demonstrate how these accounts work. Say you sign up for a business credit builder loan for $1,000. It has a 24-month repayment term and carries a 15% interest rate.
Upon sign-up, the issuer would report your account to a business credit bureau as an installment loan, then report your monthly payments after each billing period.
Over the following two years, you'd pay $1,000 in principal and $163.68 in interest. After your final payment, the issuer would report your loan as paid off and release your $1,000 in principal.
Business Credit Builder Loan Example
Credit builder loans are a relatively new financial product. While they’ve become increasingly common for consumers, the only option available is through CreditStrong.
As of the time of writing, CreditStrong is the only company that provides credit builder loans for business clients. Fortunately, it offers a diverse mix of account options, so you should be able to find an arrangement that suits you.
Here’s a high-level overview of the terms available.
CreditStrong Business Account Options
To summarize, there are four account sizes: $2,500, $5,000, $10,000, and $25,000. Each one has a payment plan with and without interest. Those without interest have higher fees due upfront, but they’re less expensive over the life of the loan.
Therefore, if you plan to keep your account open for the whole term, you’ll save money with an interest-free payment plan. However, if you cancel early, which you can do anytime without penalty, you may be better off with an interest-bearing plan.
Whichever option you choose, CreditStrong reports your financial tradeline and monthly payment activities to Equifax Business, PayNet, and the Small Business Financial Exchange. That also includes late payments if you’re delinquent by 30 days or more.
Business Credit Builder Loan Pros
Business credit builder loans can be a great way to improve your business credit score, especially if you’re relatively new to small business ownership. Here are their most significant advantages.
There are two types of credit accounts for businesses, also known as tradelines.
Vendor tradelines come from other businesses and are often extended payment terms, like net 30 accounts.
Financial tradelines include traditional credit accounts, such as a small business credit card. (Including a business credit builder card.)
Generally, vendor tradelines are easier to qualify for than financial tradelines, but financial tradelines have a higher potential for increasing your credit score. As a result, businesses often use vendor accounts to work up to financial tradelines.
However, a business credit builder loan doesn’t require a credit check. As a result, they’re one of the few types of financial tradelines you can qualify for without a good business or personal credit score, which is ideal for new business owners.
Can Build Savings
Business credit builder loans are primarily for helping you establish your business credit history. Because they don’t provide funds at sign-up, they don’t offer nearly as much financial benefit as traditional business loans.
However, they can still work as a forced savings plan. When you close your account, you get back the principal portion of your monthly payments. If you keep the account open to the end of its term, you’ll get back the entire loan amount.
That’s usually more advantageous for consumers than businesses, but it still gives you an opportunity to build credit and savings simultaneously.
Can Create a Relationship With a Lender
Business credit builder loans establish your credit history, but that’s not the only way they can help you access financing. They can also help you establish a positive relationship with the account issuer.
Credit builder loan issuers often provide traditional financing products. If you can build rapport with them, you may have a better chance of qualifying for one of their other accounts, such as a traditional installment loan or revolving credit line.
For example, CreditStrong is a division of Austin Capital Bank. After completing one of its business credit builder loans, you may be more likely to qualify for one of its cash-secured revolving business line of credit accounts.
Business Credit Builder Loan Cons
Business credit builder loans can be highly beneficial in the right circumstances, but they’re not ideal for everyone. Here are their primary drawbacks.
Unlike traditional installment loans, credit builder loans don’t provide you with any funds when you open an account. Instead, you make your monthly payments first and slowly pay off the loan amount.
During the life of the loan, the issuer keeps the principal balance of your loan as a security deposit. They do so to protect against the high risk of default since these accounts are for people with bad credit.
That makes credit builder loans unhelpful from a financing perspective. If you’re looking for an account you can use to borrow money for your business, they’re not the product for you.
Fees & Interest
Unfortunately, business credit builder loans usually have fees and interest attached to them. That’s the primary way the account providers make money and can make the accounts financially burdensome.
They typically ask for a lump-sum upfront. Since you can cancel most credit builder loans without penalty at any time, that initiation fee is necessary to protect the loan issuer. It’s the only revenue they’re guaranteed from each customer.
However, the interest charges attached to the account are usually more expensive over the long term, as the interest rate is usually similar to a personal loan. So before you sign up for an account, double-check that it fits your budget.
Despite their recent emergence, credit builder loans are a fairly common product for consumers. Many competitive accounts exist today, such as CreditStrong, Self, and MoneyLion.
Unfortunately, you can’t say the same for business credit builder loans. There are many fewer options available, with only CreditStrong offering a traditional version of the product for businesses in 2023.
CreditStrong’s business product comes in many forms, but it’s still ultimately the same account with the same provider. As a result, you may struggle to find a business credit builder loan if you don’t want to work with CreditStrong.
Is Getting a Business Credit Builder Loan Worth It?
Business credit builder loans can be a great way to establish your business credit score. Since they don’t involve a credit check, they’re among the few financial tradelines available to new business owners, even those with bad personal credit.
Because financial tradelines affect your business credit more than vendor tradelines, signing up for a credit builder loan is worth it for many small business owners. However, you must be clear on what they offer before you open an account.
To confirm, business credit builder loans won’t help you fund your business. They don’t provide any money upfront. Instead, the issuer keeps your loan proceeds as collateral during the life of the loan to protect themselves.
These accounts are only beneficial when your focus is building business credit. If you need cash now, you should look for other financial tradelines that accept less qualified borrowers, such as merchant cash advances.
In addition, you must make sure you pick a business credit builder loan that suits your cash flow and reports to your target business credit agencies.
How eCredable Can Help Build Business Credit
Business credit builder loans aren’t the only products designed to help business owners improve their credit scores. Bill reporting services like eCredable can be another valuable source for building your credit history and improving your credit rating.
When you sign up for our Business Lift program, you can add your company’s recurring expenses, like rent and utilities, to your Equifax and CreditSafe business credit reports. Each one will show up as a separate vendor tradeline.
In addition to your ongoing activities, we can report up to 24 months of payment history. As a result, eCredable can help you add years of credit history to your business credit report overnight, making it one of the fastest ways to boost your score.
To top it off, we’ll also report your eCredable subscription payment to previously mentioned bureaus, plus Dun & Bradstreet and Experian Business. And just like a business credit builder loan, there’s no credit check to sign up or cancellation fee. Give it a try today!