As a small business owner, finding the right form of financing can be difficult, especially if you’re still in the beginning stages with your company.
There are four tiers of business credit that you can obtain. Understanding each category and how the type of financing works can help you determine which paths to pursue for your small business.
Tier 1
The first tier of business financing is basic vendor trade credit. You don’t typically need to have an established business or even personal credit history to get approved, and there’s also typically no personal guarantee involved — in other words, if your business can’t repay the debt, you’re not personally liable to pay it out of your own pocket.
Tier 1 business credit provides the chance to establish your business credit score as a new business while you purchase the supplies, inventory, furniture, and other items your small business needs to function.
Just note that while some vendors may be willing to work with you as a brand-new business, some may require that you have other trade credit references before they’ll approve you with a credit line.
In general, vendors make money on margin they charge on the goods they are selling, so you don’t have to pay interest on this type of credit, as long as you pay your balance by the due date.
Tier 2
The second tier of business credit is commonly called advanced trade credit. These types of vendor accounts typically offer larger credit lines and longer repayment terms (longer than net-30, for instance). In some cases, you could even use advanced trade credit to finance an equipment purchase.
While this financing option may sound better, it’s important to note that you’ll likely need to have established some business credit before you can apply. Because of the better terms for you as the small business owner, these types of vendors are taking on more risk and will typically require a business credit check to determine whether you’re eligible.
Tier 3
Rather than working with another business to get credit, tier 3 business financing involves getting credit from a lending institution like a bank, credit union, or online lender.
Tier 3 financing is the most well-known type of business financing. It can come in the form of an installment loan, a revolving line of credit, or even a business credit card.
In most cases, you’ll be required to undergo a business and personal credit check to get approved for this type of financing. That said, eligibility requirements can vary substantially.
For example, some banks may require that you be in business for one or two years with a solid track record of revenues and good business credit. In other cases, your business can be brand new without any established revenues or cash flow and still qualify.
In many cases, you’ll also need to provide a business plan, as well as a detailed look at your company’s finances and projections.
Because loan terms, including repayment schedules, interest rates, and fees, can vary with tier 3 credit, it’s important to shop around and compare multiple lenders before you submit an application. And with credit cards, you may also be able to take advantage of other perks like rewards and travel benefits.
Because of its business friendly structure, the Credit Strong business credit builder account is one of the most readily obtainable forms of bank financing for many small businesses and it can provide the first step to getting additional Tier 3 financing from other lenders in the future.
Tier 4
With tier 4 business financing, you move beyond the lending industry in general and work with investors. This can include private investors, angel investors, and venture capitalists.
In many cases, it can be challenging to get an investor for your business unless you’re outperforming the competition or there’s a strong reason to believe that you will outperform the competition. This means that you typically need to have been in business for a while and have a strong track record so far.
You’ll also need a strong business plan, including your strategy for growth and detailed and reasonable projections.
While you won’t pay interest to an investor, you’ll likely need to give up a share of your business in exchange for their financing and advice. Carefully consider what that might look like and whether you want to invite someone else to own part of your business and have a say in how it’s run.
The Bottom Line
There are four tiers of financing available for small businesses, but many new business owners may want to start with tier 1 business credit vendors.
You may also consider applying for a business credit builder account with Credit Strong, which can provide you with a long-term commercial installment loan on your business credit profile without many of the stringent requirements typically associated with business loans.
Comments