I have noticed an influx of companies offering business credit builder programs on the internet and it has become extremely important to me that I educate entrepreneurs on the truth about these programs. Building business credit is becoming more and more important, especially since the SBA is requiring lenders to use a combination of a business owners personal and business credit to determine their eligibility for SBA loans under $350,000. Therefore building business credit would be a good move for any business owner. However, it’s important to fully understand how many of these business credit builder programs work before you decide to invest your hard earned money into them. Below are myths about business credit builder programs that some companies will not make completely obvious to you (or blatantly lie about) when signing up.
- Myth No. 1: No personal guarantee needed – This is the biggest lie I have seen perpetrated by companies offering business credit builder programs. The fact of the matter is that not all business credit lenders offer “no personal guarantee” options. Depending on what type of business credit you are applying for, you may or may not need a personal guarantee. (Providing a personal guarantee means they will check your personal credit history to determine your creditworthiness and use your credit history as “collateral” for the line of credit. This means if you make late payments or default for any reason, it will negatively affect your personal credit).
If you are applying for vendor trade lines, you may not need to provide a personal guarantee to get approved. The catch is that you can only use the vendor trade lines to purchase products and services from the vendor that issued you the line of credit and not anywhere else. A good example of this is obtaining a vendor trade line from Best Buy, Office Depot, or Quill.
Anytime a company like these approve you for a line of credit you need to understand that you will only be able to use that credit line to purchase products directly from them. Another example is an unsecured business line of credit. This type of business credit is issued by banks such as Chase and Fifth Third. You do need to provide a personal guarantee to secure this type of business credit.
You also need to have an exceptional personal credit history to get approved for this type of business credit. With vendor trade lines, you can have less than perfect personal credit and still get approved. Those are the biggest differences between vendor trade lines and unsecured business lines of credit — what it takes to get approved and how (and where) you can use them.
- Myth No. 2: Use the funds anywhere, for any business purpose – Most companies who offer business credit builder programs are not honest in their advertisements about how you can use the business credit they will help you obtain. As I stated before, the two major types of business credit (and the types most of these companies will help you obtain) is vendor trade lines and unsecured business lines of credit. One of the biggest differences between these two types of business credit is how (and where) they can be used. With vendors trade lines you can only use them to purchase products and/or services from the vendor that issued you the trade line. For example, if you get a trade line from Dell, you will only be able to use it to purchase Dell products and no where else. However, with an unsecured business line of credit you can get it from just about any traditional bank or credit union and use it anywhere for any business purpose. There are no usage restrictions with unsecured business lines of credit like there are with vendor trade lines.
- Myth No. 3: Get unsecured business lines of credit (or business credit cards) with bad credit – I recently saw this on the website of a popular company that offers business credit building programs and it is simply not true. With vendor trade lines you may be able to apply and get approved for them without having a good personal credit history (or providing a personal guarantee). However with unsecured business lines of credit that is not the case. Unsecured business lines of credit and business credit cards from traditional banks like Chase, Bank of America, Barclay’s, etc are cash lines of credit that can be used anywhere for any business purpose. It is mainly because of this that banks require borrowers to have good personal credit to get approved for unsecured business lines of credit (or business credit cards). Don’t believe companies who tell you it’s possible to get a business credit card or unsecured business line of credit without providing a personal guarantee or having good credit because it’s just not true.
The bottom line is that it would be wise to do your research and ask many questions before investing your money into a business credit builder program. You want to be sure you are obtaining business credit that will help you build a business credit history and that you can actually use to grow your business. The Funding Advisors at LenCred will be honest and upfront about the results they can help you get with their business credit builder program. These are the kinds of people you want to work with when deciding to invest in a business credit builder program. They don’t falsely advertise what can be done through the program and will be honest about what you will get out of it.