Business credit Building Tier 3 Bank Lending

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.