How Short-Term Loans Can Build Credit

how short-term loans can build credit

Many entrepreneurs are surprised at how expensive it is to run a small business. Business equipment, office furniture, employee payroll, inventory, office rent, utilities, and marketing can all add up, and fast. Plus, there are less-obvious costs around every corner that chip away at profits. These include business insurance, tax preparation and filing, business permits and licenses, and legal fees. All of these expenses can make it difficult to maintain a good credit rating, let alone give it a nice boost.

Paying your bills on time and keeping your company’s information current with the leading credit bureaus are two obvious ways to improve your business credit score. Additionally, did you know that you can also boost your credit score by borrowing money and paying it back based on the loan’s terms? In this Balboa Capital blog article, you will learn how short-term loans can build credit.

The long-term solution.

Credit ratings agencies, such as Equifax and Dun and Bradstreet, look at a variety of factors when calculating your credit score. Having a steady flow of timely credit card and loan payments will definitely help you achieve a solid business credit rating. When you take out a short-term business loan, you will repay it quicker, which means means you have an opportunity to improve your credit rating faster.

However, your credit rating will take a hit if you do not pay your short-term loan back. Even one late payment can cause your credit score to suffer. So, choose a short-term loan term and payment schedule that works with your company’s budget, and make all of your payments on time.

Short repayment periods.

The loan repayment options you can choose from will depend on the lender you work with. That said, typical payback terms for most short-term business loans range from 3 months to 24 months. In addition, you might be required to make daily or weekly loan payments as opposed to monthly payments. Short-term loans with a higher frequency of payments might seem risky, but keep in mind that the payment amounts are smaller.

To help you avoid missing payments, ask your lender if your payments can be automatically deducted from your business checking account by an automated clearing house (ACH). This eliminates the need to make loan payments manually, which can be accidently overlooked if you are too busy or away from your computer. Each time you make a short-term loan payment when it is due, you are helping your overall credit rating.

What about the interest rates?

Cost is always a concern when looking at your loan options. Depending on the lender you choose, you might have the option of applying for either a secured or an unsecured short-term business loan. Unsecured loans do not require any collateral, but they have higher interest rates than secured business loans, so take this into consideration.

Regardless of the type of short-term loan you pick, it can help you address cash-flow issues, handle unexpected emergencies, purchase inventory, pay your employees, and more. And, as mentioned earlier, you can repay your loan in a relatively short period of time and improve your credit score. Eventually, you will be able to secure financing, loans, and lines of credit with favorable rates as a result of your higher credit rating.

Do not ignore your personal credit.

If your small business is a one-person limited liability corporation (LLC) or a sole proprietorship, your business credit will be associated with your social security number. These two types of legal business structures do not require company tax IDs or federal employer identification numbers. If you run a one-person LLC or a sole proprietorship, make sure that you stay on top of your bills.

Your personal credit score and borrowing power will be negatively impacted if you make late business loan payments or default on your short-term loan. This might present you with problems when it comes time to apply for a business credit card, home loan, car loan, or personal loan.

The information in this blog post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, investing or accounting advice. You should consult with your accountant, lawyer or tax advisor before making any business decisions or moving forward with business funding.