Credit and financing are challenges that many business owners don’t realize they face until they need it.  

Machinery breaks, and it’s too expensive to fix with cash on hand. A small business lands an important contract and needs to hire more staff quickly to get the work done. A great piece of real estate becomes available, and would be perfect to expand the business. Or sales are growing, but that means purchasing a lot more inventory. 

Whatever the reason, if your business is ready when financing needs arise, you’ll find it easier and a lot less stressful to get what you need. 

Here we’ll explore common financial and credit challenges small business owners face, and what you can do about them.  

Why It’s Important to Build Strong Business Credit in 2024

According to the Federal Reserve’s 2024 Small Business Credit Survey of employer firms, most small businesses surveyed—93%—reported experiencing financial challenges in 2023. “In both 2022 and 2023, the most commonly reported financial challenge was the rising costs of goods, services, and/or wages,” the report says. 

In terms of financing, just over half of respondents who applied for funding (51%) were “fully approved for the financing for which they applied.” 

That means nearly half didn’t get all the financing they needed. 

While this is higher than the 46% whose loan applications for small business loans or financing were fully approved during the pandemic, it’s still below pre pandemic levels. 

And satisfaction with lenders, including online lenders, large and small banks, and finance companies declined, with high interest rates listed as the major complaint. 

SCBS survey data reported in a separate report found that startups whose founders are people of color “are significantly less likely than white-owned startups to receive funding through financial institutions or lenders, despite being as likely—and, among nonemployers, more likely—to apply for financing from a lender.” 

Good credit can’t solve all of these problems. Interest rates are higher mainly because the Federal Reserve raised interest rates to try to tame inflation, for example. That means even the best loans carry higher rates than in recent years, and aren’t predicted to go down until later in 2024 at the earliest. 

And biases in lending, whether implicit or explicit, are significant hurdles that both the industry and policymakers are trying to address. 

Still, good credit can often help businesses qualify for different types of small business financing, lower interest rates, and/or higher credit limits. Credit isn’t the only factor that goes into small business lending decisions, but it is an important one. 

Let’s look more closely at challenges small business owners face, and more importantly, what you can do about them. 

1. Lack of Business Credit Literacy 

If you don’t understand business credit, you certainly aren’t alone. Nav research has found that many business owners don’t know their business has business credit reports, much less what’s in them. 

Here are some key terms and definitions to help get you started.

• Credit score: Business credit scores are a shortcut for a business’s creditworthiness, based on its credit history. A higher score typically means the business is more likely to repay debt. Find out what’s the highest business credit score you can get here.
• Credit report: A business credit report lists information about the business, debts, and other financial information about the business.
• Trade credit: Supplier and vendor credit lets businesses buy now and pay later. Terms are often net-30, net-60, or net-90 days after the invoice date.
• Business line of credit (LOC): Similar to a credit card, a business line of credit gives your business access to a certain amount of money and you can choose how much you use. You only pay interest on the amount borrowed.
• Invoice factoring: A type of financing where a business sells its outstanding invoices to a factoring company at a discount in exchange for immediate cash.
• Personal guarantee: A legal promise usually made by a business owner to repay a business loan if the business can’t. The applicant promises personal assets as collateral.
• UCC filing/UCC lien: A filing lenders use to publicly declare what business assets are pledged to the lender in case of a loan default. 
• Debt-to-income ratio (DTI): A financial ratio that compares a business’s monthly debt payments to its monthly income. It helps lenders assess the risk of lending to a business.
• Credit utilization ratio: A ratio that shows what percentage of available credit a business is currently using. High credit utilization is often an indicator of high risk. 

2. Separating Personal and Business Credit

You and your business can have your own credit reports and scores. They can each stand on their own, or work together to help your business get the financing and benefits it needs. As a small business owner, you will often have to take specific steps to separate your business and personal credit, and keep it that way. 

The risks of commingling personal and business credit

Keeping your business and personal finances is important for a number of reasons. It can help maintain the asset protection benefits of a business entity, and it can make tax time easier by helping you track business expenses that may be tax deductible. 

Similarly, keeping your business and personal credit separate can help your business borrow solely on its own qualifications, and may help your business move away from borrowing with personal guarantees. 

Tips for properly separating credit histories and building business credit from scratch

When you start your business, you can start building business credit. And that’s often the case even if you don’t have excellent personal credit. 

 The main step in building business credit is to get tradelines, or accounts, in the name of your business. 

Whenever possible you want to use business accounts rather than personal accounts. 

Need a credit card for purchases? Use a business credit card instead of a personal one. (If you have a limited credit history, a business charge card can be a good alternative. And there are some business credit cards for bad credit.) 

If your business operates as a sole proprietorship, remember that there is no legal separation between you and your business. That’s one reason many experts recommend setting up a business entity like an LLC or corporation as soon as its feasible. 

3. Insufficient Credit History

It’s not uncommon for a business owner with an established business to check their business credit reports and discover they don’t have much of a credit history. They may also discover their credit scores are low due to this lack of history.

Why lack of credit history is a hindrance

Anyone can check business credit, and you probably won’t know when they check it for your business. A lack of credit history can be a hindrance in a few ways:

• Lenders may not feel comfortable extending credit to your business without collateral or a personal guarantee.

• Companies may be unsure about whether your business has the capability to take on large contacts with significant financial responsibility.

• Your credit scores may be low due to lack of information reporting, rather than negative information. 

Strategies for building credit history as a new business

As mentioned before, tradelines are accounts that report to business credit bureaus, and they are key to building a credit history. They include:

• Net-30 vendor accounts
• Nav Prime
• Business credit cards
• Lines of credit 
• Small business loans

Get tradelines, pay on time, and keep credit utilization low to help build a strong credit history. These steps work whether your business is a startup or well established. 

Also worth noting: not all of these types of accounts report to all business credit bureaus; check with specific lenders or vendors.

Read Nav’s guide: How to Establish Business Credit

4. Lack of Cash Flow

How your business manages cash flow has a direct impact on your business financial health. It can also impact your credit. 

Cash flow measures the money going in and out of your business. How your business manages cash flow often has a direct impact on your business financial health. It can also impact your business credit.

When clients pay late, your business may also find itself unable to pay its bills on time. If too many expenses hit at once, your business may find it impossible to invest for growth.

Expert insight: poor cash flow impacts credit

The two most important factors in any credit scoring model are payment history and debt. How you manage both will directly affect your credit scores. Let’s look at payment history in more detail: 

Most credit scoring models take into account on-time payments, as well as late payments or other negative information such as collection accounts, judgements or liens. When cash flow is tight, you may find your business struggling to pay its bills on time.

If those payments are late, even a few days, it may affect your credit scores. Business credit reports typically track payment history using “days beyond terms” or “DBT”. A payment that’s made five days after the due date, for example, may be reported as 5DBT. 

Given that credit scoring models will take into account how promptly your business pays accounts that appear on your credit reports, being able to make payments out of cash flow can be critical to maintaining a good credit history. 

Ways to smooth out cash flow and make on-time payments

Keep a close watch on your cash flow and try to set aside enough money to at least make your minimum payments on time. A line of credit or even a 0% intro APR business credit card can be helpful for times when cash flow is tight; and if you pay those accounts on time they can also contribute to a good credit rating. 

While expanding your business to increase income is a natural solution, it’s crucial to be strategic about the increased expenses that often accompany higher sales volumes. Again, cash flow isn’t just about how much money your business earns or spends, it’s also about timing.

Read: Cash Flow Vs Profit: What’s the Difference?

5. High Debt Levels

Behind payment history, debt is the other main factor that has an impact on credit scores. 

Drawbacks of carrying too much debt for a small business

Debt financing can be a valuable tool for businesses, and offer opportunities for growth that may not happen organically. When sales are strong, debt can help your business hire more staff, invest in more inventory, a new location, or purchase more efficient equipment.

But with more debt comes more responsibility. You need to maintain enough sales–and profits–to make payments on time. And that can be tough when cash flow is tight. 

How to reduce debt

There isn’t always a straightforward path out of business debt. The solution that works for your business may be different than what works for another. 

Options to consider include:

• Refinancing debt for lower interest rates and/or reduced payments;
• Increasing sales and decreasing expenses to free up cash for larger payments; or 
• Negotiating lower payments or restructuring existing debt. 

A financial professional can help you explore options for getting your business out of debt.

6. Mistakes in Credit Reports

When you check your business credit reports, you may find information in your reports that is out of date or even erroneous. Correcting that information may help improve your business credit, depending on the type of mistake. 

Common errors in business credit reports

Here are a couple of common mistakes that can occur on business credit:

1. Mixed files. Information about a business may get mixed up with that of another business; often one with a similar name. An incorrect account listed on your credit report can be a problem even if it’s paid on time. A lender may think you aren’t disclosing debt, for example, or the payments could be figured into a debt ratio calculation. 
2. Outdated UCC filings. Business credit reports often list UCC filings, or UCC liens. These are filed when creditors take a security interest in the property of the business. (A business pledges some kind of asset in exchange for financing.) Sometimes UCC filings remain active even after a debt is repaid. This can make it harder to get financing. 

Steps for identifying and correcting mistakes

Business credit reports can be confusing. Take the time to review yours carefully and question information you don’t understand. Each business credit bureau has specific procedures you can follow to dispute information you believe is wrong. 

7. Monitoring Business Credit Reports

If you don’t check your credit, you won’t know what’s in your credit reports.

The importance of regularly monitoring business credit reports

Business credit monitoring is essential for several reasons:

1. Business identity theft is on the rise. Monitoring your credit may alert you to activity that can indicate fraud, including new accounts, inquiries, or even collection accounts. 
2. See what others see. Lenders, insurance companies, and other businesses may check your credit. Do you want to know what information they see when they do? Reviewing your credit ratings will help you understand what may be holding your business back from financing or other opportunities. 
3. Monitor your progress. Whether your goal is to establish good business credit or maintain a strong business credit rating, checking your reports and scores is the best way to understand how your business is doing. 

How to obtain reports and dispute potential errors

Although we’ve talked mostly about business credit here, entrepreneurs should also check and monitor personal credit reports as well. Again, lenders have their choice of which credit reports to check, and may check personal credit, business credit, or both. That means it’s to your benefit to be aware of what’s in both types of reports. 

If you find mistakes on your credit reports, you’ll want to dispute them following the instructions provided by the credit reporting agency. 

Nav is the only source where small business owners can monitor multiple business and personal credit scores in one place.

Predicting Future Challenges

LIke a lot of financial services, the way we use and access credit continues to evolve. 

Emerging trends that may impact small business credit access

Credit access can mean the ability to small businesses’ to get funding, and it can also refer to the ability of business owners to check their business credit. Let’s start with access to credit first.

Credit access for small businesses depends on several factors such as a business’ credit history, sales and revenue, collateral, and whether the business is in a high-risk industry.

But today there are certain trends that are also beginning to play a role in small businesses’ access to capital. One is the rise of fintech lenders. Fintechs, which operate solely online, tend to have higher approval rates for those from underserved communities and those with higher credit risk. (Though costs may also be higher.)

AI also has the potential to help small businesses access more capital. As technology has improved and become a larger part of the underwriting process, lenders have been able to use more and more alternative data to help make decisions. With AI, the hope is that decisions can be made quicker with an even wider range of data with less bias.

It’s also important to understand how businesses access their business credit reports. It was only a few years ago that businesses had no options to check and view business and personal credit in one dashboard. Nav was the first company to make that possible.

In early 2023, the Federal Trade Commission announced it was studying the business credit reporting industry. Their research may result in changes to the way certain aspects of the industry work. 

How alternative credit models may help address challenges

On the personal credit side, credit scoring models are trying to increase access to credit, especially with individuals who have traditionally been “credit invisible” and have trouble accessing credit as a result. 

In the housing market, for example, the Federal Federal Housing Finance Agency (FHFA) has announced it has approved both the FICO 10T and the VantageScore 4.0 credit score models for use by Fannie Mae and Freddie Mac. Previous models used in mortgage financing are more than two decades old at this point. 

Impact of Current Economic Conditions

Many small business owners have referenced high interest rates and inflation as some of their largest concerns. 

 Interest rates have risen quickly in the past few years, and while they will likely start to go down, the days of really cheap capital are likely over for now. Still lower rates can help businesses pay off debt, get better financing, increase sales, and improve cash flow overall. It is too early to fully say what will happen, but the changes in economic conditions are expected to be beneficial for small business owners.

Overcoming Credit Obstacles

Whether you are just starting your business, or trying to grow it, knowing how credit works can help you leverage it to your advantage. 

Top tips and best practices

The top three things you can do when it comes to your business and credit are:

1. Check, monitor, and manage your business and personal credit reports and scores at least monthly. 
2. Get and use tradelines that report to business credit bureaus, and pay on time.
3. Keep debt within manageable levels, both to help with cash flow and to maintain a good payment history. 

Of course there are other things that can help, such as having a mix of different types of accounts and avoiding unnecessary inquiries, but if you’re able to stay on top of the basics, you’ll go a long way toward building good credit. 

Resources for continued credit education

Nav offers lots of resources to help you understand how business credit works, and how to use it to your advantage. The Nav blog offers detailed articles on lots of credit and financial topics. 

And when you sign up with Nav, you’ll get emails with the latest tips and resources. 

How Nav Can Help

Nav can help you check, monitor and manage your personal and business credit, and your business financial health, in one easy-to-use dashboard. 

With Nav Prime, you can see both personal and business credit scores*. You’ll get  Detailed Credit Reports from two leading business credit reporting agencies: Equifax® and Experian™; along with two business credit scores: the Equifax® Business Delinquency Score® and  Experian™ Intelliscore Plus^SM V2. 

Personal credit is also important to lenders, and with Nav Prime you’ll get personal credit scores and detailed reports from  Experian™ and TransUnion®. Scores provided are the TransUnion® VantageScore® 3.0, and Experian™ VantageScore® 3.0. 

Nav Prime offers a tradeline submitted monthly to the major business credit bureaus to help you build and maintain a strong business credit history. 

A free Nav account provides a business credit summary report and grade from Equifax® and Experian™ and a personal credit score and summary report from Experian™. 

Get started with Nav here. 

Frequently Asked Questions

What is a good credit score?

In the Federal Reserve Banks’ Small Business Credit Survey (SBCS) mentioned earlier, credit scores are defined this way:

“Credit risk is determined by the self-reported business credit score or personal credit score, depending on which is used to obtain financing for the business. If a firm uses both, the higher risk rating is used. 

• ‘Low credit risk’ is an 80–100 business credit score or 720+ personal credit score. 
• ‘Medium credit risk’ is a 50–79 business credit score or a 620–719 personal credit score. 
• ‘High credit risk’ is a 1–49 business credit score or a <620 personal credit score.”

What habits lower your business credit scores the most?

There are two habits that can lower your business credit scores:

1. Not using any type of credit. Business credit scores are created using past payment history. If your business credit reports don’t list any accounts with payment history, it’s nearly impossible to get a good credit score. Note that you don’t have to go into debt to build business credit. Tools like Nav Prime and business credit cards or charge cards your business pays in full can help build business credit. 

2. Paying late. Once you get credit accounts that report to business credit, it’s crucial that you pay on time. Again, late payments hurt your credit scores.

How do I check my business credit?

Unlike personal credit, there’s no legal requirement that business credit bureaus offer free business credit reports. Nav offers free and paid personal and business credit monitoring solutions. 

What are the best small business loans?

The best small business loan or financing option is the one that helps your business get what it needs to continue to grow or thrive financially. Ideally a loan will offer quick funding, a low interest rate and fees, affordable monthly payments, and offer a large credit limit or credit line. 

Sometimes you may have to compromise on one or more of those factors. Loans guaranteed by the US Small Business Administration (SBA loans), for example, often carry lower interest rates, but have a rigorous underwriting and approval process. The same is often true for small business loans from traditional banks or credit unions. 

What is the approval rate for small business loans?

Approval rates may depend on the type of financing, and borrower qualifications. Here are some of the small business financing approval rates identified in the SBCS study mentioned earlier, based on: 

Age of the business (fully approved)

• 40% of businesses 0-5 years
• 53% of businesses 6-20 years
• 66% of businesses 21+ years in business

Annual business revenue:

• <$100K: 31%
• $100K-$1 M: 50%
• $1 M – $10M: 58%
• >$10 M: 88%

By race/ethnicity:

• Black: 32%
• Hispanic: 42%
• Asian: 34%
• White: 56%

*Nav provides access to Experian™ Intelliscore PlusSM V2, Equifax® Business Delinquency Score®, TransUnion®VantageScore® 3.0, and Experian™ VantageScore® 3.0. VantageScore is a registered trademark of VantageScore, LLC.