There are four different business credit tiers that you can use to build your business. Understanding how each tier works can help you find the right financing to meet your needs while building business credit.
Tier 1
Tier 1 credit, commonly referred to as basic trade credit, is the most readily accessible type of business financing. You generally don’t need an established business credit history or a high personal FICO score to get approved for accounts from vendors at this level.
What’s more, you typically don’t need to provide a personal guarantee. That means most tier 1 business credit vendors can’t come after your personal assets if your company defaults, making basic trade credit the least risky form of business financing.
As a result, tier 1 credit accounts are a great way to build business credit from scratch. They can help you establish a handful of initial tradelines with each major business credit bureau and lay a foundation of credit for more essential financing in the future.
Conveniently, tier 1 business vendors are often office supply stores that sell practical items for a small business owner trying to get off the ground. For example, Crown Office Supplies and Summa Office Supplies offer net credit to new businesses.
However, tier 1 credit accounts are often allowances for longer repayment terms, frequently no more than net 30. As a result, you won’t incur interest with basic trade credit as long as you pay by the required due date, but you won’t be able to finance anything for very long either.
Typical Credit Profile Needed for Tier 1 Credit Accounts
Tier 1 credit accounts have the least demanding eligibility requirements, and you should be able to qualify for some without any previous business credit history, even if you have a bad credit score personally.
For example, you can qualify for net 30 payment terms from Creative Analytics as long as your business meets the following requirements:
- Operate in the United States
- Have an IRS-issued Tax ID (Federal EIN)
- Have a Dun & Bradstreet-issued DUNS number
- Be established for at least 30 days
- Not have any derogatory business reporting or delinquencies
- Applicant must be an Authorized Officer of the organization
That said, the requirements for basic trade credit vary between vendors, and some may require that you have other tier 1 accounts before approving you. As a result, you may need to shop around to get your first tradeline.
Tier 2
Tier 2 business credit is also known as advanced trade credit. Though it’s still a form of vendor financing, it gives small business owners access to higher lines of credit and longer repayment terms than basic trade credit.
For example, Home Depot offers a commercial account that grants you up to 60 days to pay. If you qualify, you’ll receive a dedicated card attached to your credit line, and the size depends on your business’s qualifications.
Though Home Depot doesn’t disclose their maximum credit limits directly, at least one third party claims they can approve you for as much as $2,000.
Advanced trade credit accounts help you round out your business credit report before you transition into more traditional business financing, such as installment loans from financial institutions.
Because they’re harder to qualify for and involve larger sums of money, they may look better as trade lines in your credit report than tier 1 accounts. As a result, you should think about applying for them as soon as you’re confident in your chances of qualifying.
Typical Credit Profile Needed for Tier 2 Credit Accounts
Tier 2 business credit vendors have more restrictive qualification requirements than tier 1 providers. To get advanced trade credit accounts, you usually need between three and five tier 1 accounts with positive payment histories. You may also need to sign a personal guarantee.
For example, your business must be reasonably well-established with multiple tier 1 tradelines and a generally positive payment history to qualify for the Home Depot commercial account.
You’ll also need to sign a personal guarantee unless your business is a legal entity other than a partnership or sole proprietorship with at least ten employees, $2 million in annual revenue, and two years of operating history.
Tier 3
This type of business financing involves obtaining credit from a lending institution like a bank, credit union, or online lender instead of a merchant vendor.
When most people think about small business financing, tier 3 financing is what they generally imagine. It can come in the form of an installment loan, a line of credit, or a business credit card.
You’ll typically need to undergo a business and personal credit check, but requirements can vary depending on the lender and type of financing. Lenders often require a business plan and a detailed summary of your financials, including projections before extending high credit lines.
For example, getting a term loan from a bank may require a solid track record for your business credit history and your financials. In contrast, you may be able to get a business credit card without any experience at all.
Tier 3 financing can be a good option for small business owners who need more flexibility than vendors can provide since you can use a line of credit or term loan to cover a wide variety of expenses rather than just supplies and inventory.
However, loan terms can vary depending on a variety of factors, so make sure you shop around to find the best fit.
Typical Credit Profile Needed for Tier 3 Credit Accounts
Qualifying for a tier 3 credit product is significantly more challenging than getting tier 2 credit. However, the eligibility requirements for tier 3 accounts also vary much more than they do for trade accounts.
Generally, it’s easiest to obtain financing from online lenders, while banks and credit unions typically have higher credit score range requirements. The tradeoff is that online lenders also have less favorable terms.
Whatever option you pursue, your application strength depends on more than just your creditworthiness. Lenders also focus on your annual revenues and time in business.
If you meet the financial and operational requirements, you only need a fair personal credit score to qualify for the less desirable tier 3 accounts. Meanwhile, you’ll need a good to excellent personal credit score and a well-established business credit history for the best ones.
Tier 4
Tier 4 business financing goes beyond vendors and lending institutions entirely, instead focusing on private investors, angel investors, and venture capitalists. If you decide to go this route, the standard measures of creditworthiness become less relevant.
In fact, you can generally only obtain this type of financing if your business is already well established and outperforming your competitors, or if there’s a compelling reason to believe that it will do so in the future.
You’ll typically need to provide a strong business plan and a good strategy for aggressive growth. As a result, this type of financing is often more popular with startups looking to scale rapidly than with traditional small businesses.
If you succeed in catching an investor’s eye, they’ll often choose not to give you a traditional loan that involves repaying them like a lender. Instead, they may ask for equity in your company and a seat at the table for major business decisions.
Equity financing can be highly beneficial since you also gain an experienced and astute advisor with a vested interest in your success. However, it’s typically more expensive than debt financing, and you have to give up some control over your business.
Typical Credit Profile Needed for Tier 4 Credit Accounts
To qualify for tier 4 financing, you need to convince intelligent and experienced business people that they should invest in your company. Accomplishing this is a much more nuanced challenge than qualifying for trade credit or a traditional business loan.
In addition to the initial hurdle that your company should already be excelling or poised to do so, it can take a significant amount of networking to get the opportunity to pitch yourself to potential investors and have a chance of earning their favor.
As a result, while good personal and business credit can only help your chances, it will never be the primary reason you receive funds from an investor.
The Bottom Line
Business owners have access to four tiers of financing. While many start at the first tier, it’s important to move up to higher tiers as your company grows.
You’ll not only get access to more credit and better repayment terms, but you’ll also get the chance to add more credit accounts to your business credit history, which can help improve your odds of getting approved for more financing when you need it.
In addition to these and other tier 2 business credit vendors, consider using a business credit-builder account with CreditStrong to add an installment loan to your business credit profile.
