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Practical Business Skills

Types of Business Credit

Businesses can have a credit history and credit scores that are separate from the business owner’s credit. Building your business credit can make it easier to qualify for a line of credit, loan or credit card. You can then use these accounts when you need to borrow money to help run and grow your business.

Learning how to build and manage your personal credit may also be important. Many small business owners find their personal credit history is also important, because lenders may review the business owner’s personal credit before approving a new account.

However, before you decide to borrow money, calculate the costs associated with the loan and the impact on your business. Getting approved for a loan doesn’t always mean you should accept it.

Remember, you’ll need to repay the money plus fees and interest.

If you’re borrowing money without a clear plan for how it will improve your business, or how you’ll repay the loan, you might not want to take on the debt. Otherwise, you could wind up using most of your company’s revenue to repay debt and you won’t have money leftover for yourself or to invest in the company’s future.

On the other hand, if you think a loan can help your business make or save more money than you’ll pay in fees and interest, then the loan might be a good idea.

The benefits of business credit

In the Business Credit section, you can find the five steps you can take to establish and build good business credit.

In short, you’ll need to legally create a business entity, such as a corporation or limited liability company. Then, you’ll have to open accounts with companies that report your payment history (such as on-time, ahead of schedule or late bill payments) to the business credit bureaus. If you have a line of credit or credit card, only using a small portion of the money you’re allowed to borrow and consistently paying it off could help your business credit.

Establishing a good business credit history could help your business:

  • Qualify for higher loan amounts and lower interest rates when borrowing money
  • Pay less for business insurance
  • Receive better agreements with suppliers

If you don’t build business credit, you may be able to use your personal credit to borrow money for your business. However, your personal savings and possession may be at risk if you can’t afford to repay the money you borrow using your personal credit. Additionally, using your personal credit for your business could make it more difficult to qualify for a personal loan, such as when you want to buy a vehicle or home.

Whether you rely on your business’s credit, your personal credit or a mix of both, you might consider three ways to borrow money: a credit line, a loan or a credit card.

Business credit line

Opening a credit line gives you the option to borrow money in the future. When you open a credit line, your account will have a credit limit, which is the most money you can borrow at one time.

For example, you might get approved for a credit line with a $5,000 limit. You can take out one or multiple loans until the total amount is $5,000. Generally, you only pay interest or fees on the amount you borrow, so borrowing as little as possible will help save you money.

Credit lines are revolving accounts and you can repeatedly borrow from the account without reapplying. For example, you could borrow $1,000 from your $5,000 credit line and the lender will transfer the money into your account. Then, you will repay the $1,000 plus interest. Once you do, you can borrow up to the full $5,000 again.

Or, you might be able to take out another loan while you’re still repaying the first as long as the combined loan amounts are below $5,000.

Opening a line of credit could help ease concerns about money. You will have some certainty that you can borrow money if you need to pay for an expense or invest in a new opportunity. However, shop different lenders before opening a credit line, otherwise you might pay more in fees and interest than you need to. For example, some (but not all) accounts have an annual fee, which you’ll need to pay even if you don’t take out a loan.

Business loan

Perhaps you need to order a shipment of supplies or want to buy a vehicle so you can make deliveries. If there’s a single expense that you can’t afford in full, taking out a business loan could be a good option.

With a business loan, you’ll receive the full amount you want to borrow immediately and will repay the money, plus interest, over time. There are some special types of business loans, such as equipment loans that you can use to buy (rather than rent) an expensive piece of equipment.

The amount of money you can borrow, interest you pay and how long you have to repay the loan can depend on many factors, including:

  • The lender
  • Your personal credit
  • Your business's credit
  • Your business plan
  • How much money your business makes
  • How long you’ve been in business
  • Whether you offer collateral, which is something of value the lender can take if you can’t repay the loan, such as a house, business building or vehicle.

Lenders may have different requirements and offers, and shopping around to get multiple loan offers could help you secure a good loan. Many small business owners may need to sign a personal guarantee for a business loan, meaning they agree to repay the loan if the business isn’t able to make its payments.

Business credit card

You can use a business credit card to pay for everyday business expenses, and in case you need to borrow money. Business credit cards may offer some benefits that aren’t available on personal credit cards, such as:

  • Employee cards, which let you give an employee a credit card that’s tied to your business account. You may be able to limit how much the employee can spend and where the employee can use the card.
  • Using a business card could help separate your personal and business expenses, which will make it easier to keep accurate business records and organize your expenses before filing tax returns.
  • A business credit card could help your business build its credit history.
  • Purchases and balances on your business credit card might not impact your personal credit history. However, you may still be personally responsible for the debt, and unpaid business credit card accounts could wind up on your personal credit reports.

Credit cards tend to have higher interest rates than credit lines or loans, and they may be a more expensive form of financing for larger purchases if you are unable to pay them off right away. However, they can offer a good short-term solution for managing day-to-day expenses.

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