Credit 101: Why Some Funding Providers Care About Your Personal Credit Score & Others Don’t
Your credit score is a measure of risk — i.e. how likely (or unlikely) you are to meet your repayment obligations. When a funder is deciding whether or not to approve your loan application, they want to know if they’ll get their money back. But, for businesses, a credit score isn’t the only measure of risk — especially your personal credit score as a business owner.
The reality is, your personal credit score is not a reflection of the health of your business. On one hand, small and online business owners often sacrifice their personal credit to launch their businesses, maxing out credit cards to fund early-stage initiatives. As a result, they’re unlikely to get approved for financing from traditional providers, who often put a lot of emphasis on a business owner’s FICO score. On the other, you can’t build business credit without getting financing for your business in the first place.
Fortunately, many funding providers understand this credit catch-22, and don’t require a personal credit score as part of their application process. Instead, they look at other risk factors, such as your sales history and overall business health.
Why & How to Build Business Credit
Your business credit score is a measure of your business’s creditworthiness — not your creditworthiness as the business owner. Traditional business credit bureaus look at a variety of factors to create your business credit profile. These include, but are not limited to, public filings, business liens, industry risk factors, supplier and vendor relationships, any history your business has with banks or other funders, and more. Tillful places greater emphasis on transaction-level data, and so its score is often much more up-to-date, and available to a far greater percentage of small businesses, which are often overlooked by traditional bureaus.
Building business credit allows you to establish a financial record of your business that is separate from you, the owner. This will make it easier for you to get financing — especially large amounts of financing — down the road. With that, here are a few ways to build credit for your eCommerce business:
- Check your business credit profile. We recommend checking your business credit profiles regularly to make sure there aren’t any errors — and so you can get a holistic view of your business credit profile. Tillful is a fantastic resource for your business credit score.
- Avoid using personal credit for business purposes. Keep business expenses and loan applications as just that: for business. This means NOT using personal credit cards or taking out other personal financing options for your business. Not only are you not building business credit, you are also putting your personal credit score at risk.
- Set up trade credit with your suppliers. If you pay suppliers and manufacturers on net terms — like 30, 60, or 90 day terms — and you make payments in full and on time, you can start building business credit with traditional bureaus, who still place a great deal of emphasis on this kind of tradeline credit. Just ask if your suppliers will report your repayment history to the credit bureaus.
- Meet all payment obligations. Stay up to date on payments for any business credit cards, business-related expenses, etc. Most missed or late payments can negatively affect your business credit.
For more information about business credit, check out this helpful guide from SCORE, an organization that provides free mentoring for small and online businesses.
eCommerce Funding Options
Now that you have an understanding of personal vs. business credit, let’s look at your eCommerce funding options. In this section, we’ve organized options based on how much emphasis these funders put on credit.
High Emphasis on Credit: Traditional Financing
Traditional lenders may consider your personal credit score as part of your business’s overall creditworthiness. These options are most suitable for well-established businesses, typically with a brick & mortar location. Consider these if your eCommerce business has years of operating history, a physical location, and you, as the business owner, have a strong FICO score.
Bank Loans & Lines of Credit
Banks offer business loans and lines of credit (including business credit cards) to the healthiest businesses that have a proven track record of sales and operating history. They offer large loan amounts, long payment terms, and low interest. For example, $1 million over 20+ years with single digit interest. Their application process is long and requires a lot of paperwork, and approval rates for small and online businesses tend to be low. If you think you meet a bank’s minimum requirements, expect to wait several weeks or even months to get a decision and funding.
The Small Business Administration (SBA) understands that small businesses have a difficult time getting financing from banks. Their loan program is designed to help small businesses get financing from banks and credit unions.
To alleviate some of the risk that concerns traditional lenders about small business, the SBA guarantees these loans. So, approval rates tend to be higher than those at banks, but the process is still long and, since you’re still applying with a traditional lender, you should expect credit to be a main measure of creditworthiness.
Low Emphasis on Credit: Alternative & Online Lenders
Alternative and online lenders look at more factors than just credit — and some even market themselves as go-to lenders for business owners with bad credit. Regardless of your credit, these options might be a fit for your eCommerce business if you are looking for fast, flexible financing to boost cash flow and/or invest in growth.
Online Business Loans
Some online lenders like BlueVine, OnDeck, and Funding Circle offer financing to businesses whose owners have a credit score as low as 500. Typically, they offer short term financing, with loans between $5,000 - $250,000 for 3-24 months. Their application processes are simple and fast, requiring little to no paperwork, presenting decisions in minutes, and funding in as fast as 24 hours. Your Tillful score can get you pre-approved with these lenders.
Invoice financing — also known as invoice factoring — is when a business essentially sells its receivables at a discount or for a fee. For example, rather than wait for a customer to pay an invoice with 30, 60, or 90 day terms, an invoice financing company like BlueVine and Funding Circle would advance a certain amount of it immediately to help you bridge cash flow gaps. The remainder is reimbursed when the invoice is paid in full, minus a fee.
If you’re an eCommerce business selling on marketplaces that pay on terms such as Amazon, Newegg, or Walmart, you can turn net 14 into net 1 with Payability Instant Access. Instant Access is a high- tech factoring solution designed for marketplace sellers paid on terms. More on Instant Access and other eCommerce-specific solutions below.
No Credit Checks At All: eCommerce-Specific Funding Solutions
Some eCommerce-specific funders don’t even factor in your personal credit. Instead, they look solely at your selling history and business performance to assess creditworthiness and make decisions. These options are great for eCommerce businesses that want a solution designed specifically for their unique eCommerce needs, with fast funding, transparent terms, and flexibility. Consider these options if you’re looking to maximize cash flow, turn inventory faster, and/or invest in growth.
Amazon and Shopify separately launched their own invite-only financing programs for top sellers on their respective platforms. Neither program — Amazon Lending or Shopify Capital — runs credit checks as part of their underwriting process.
Amazon Lending offers loans up to $750,000 for high-performing Amazon sellers only. Shopify Capital offers loans and merchant cash advances up to $1 million to their top Shopify sellers.
Both programs are invite-only, which means you can only apply if you see an offer in your Amazon or Shopify account. For example, say you’re a top seller on Amazon, get an offer from Amazon Lending, and end up applying. They’ll make their decision based on your Amazon sales history — and they don’t run credit because they really don’t need to. Shopify Capital works in exactly the same way, taking your Shopify history only into account when making a funding decision.
If you sell on either platform and see a financing offer in your account, you can apply without worrying how your credit score will impact whether or not you get approved.
Payability is a financing company designed specifically for eCommerce businesses. Their decisions are based entirely on your selling performance and they never run a single credit check. Instead, they factor in your selling history across all the eCommerce channels you sell on, including Amazon, Shopify, Tophatter, Newegg, Walmart, and more. Plus, they have a variety of financing solutions to help eCommerce sellers maximize cash flow and invest in long-term growth. For example:
- Instant Access: Get your marketplace payouts the next business day after making a sale, every business day.
- Instant Advance: Get a large lump sum of cash, up to $250,000, based on your future receivables.
Payability’s application is entirely online and only takes a few minutes to complete. You could get approved and start receiving funds in as fast as 24 hours without any credit checks.
As you can see, there are a variety of funding options for your eCommerce business — even if you have bad credit. To find the right solution for you, you first need to think about how much money you need, when you need it, and what you need it for. Keep in mind that funding options that put low to no emphasis on credit aren’t solely designed for businesses with bad credit — they just understand that there’s more to your business’s creditworthiness than FICO.
Good or bad credit? Regardless of your score, you can still get financing to take your eCommerce business to the next level.
By Victoria Sullivan