Most people who do business for a living will swear by the fact that it needs a lot of hard work. In fact, businesses cannot flourish unless one adheres to certain rules and regulations.
It is very important to understand the inner mechanisms of establishing small business credit to build a successful empire.
The number of entrepreneurs and businessmen and women has increased ten times in the last decade. Chances are that there is at least one man or woman in your close friend circle who delves in business. Doing business might be a common form of employment right now, but it is tricky nonetheless.
Now if you are into business, you must have heard of business credit. Sometimes we don’t understand the sheer importance and the advantages of small business credit. If you are confused or unfamiliar with the term, read on to find out all about it.
What is business credit and why do you need it?
In simple terms, a business credit is your ability to get a loan from a money lender. Your business credit assures the lender that their money will be returned in full amount and in a timely fashion. This money can be used to acquire goods and services and other essential requirements for your business.
There are several types of business credit that you can acquire from credit lenders for your business. These are:
1. A trade credit
In a trade credit, a local business will allow your company to buy goods and services of a particular amount set in advance. The total bill can be then paid back within ten to sixty days depending on your contract. The trade credit is also known as the supplier credit.
2. An installment credit
This can be compared to a regular bank loan in which the bank loans you a lump sum amount. In this case a money lender does the same and the borrower is expected to pay back the amount in regular monthly installments for a particular length of time like six to twelve months.
3. A service credit
Every service provider that you have agreements with is a kind of service credit. A service provider like an internet company provides you with an internet connection with an agreement that you will pay for the service provided each month. Every service credit is not reported back to a business credit reporting agency.
4. A revolving credit
A revolving business credit gives you a certain amount of money as credit which you can use to finance your business requirements. Once you have withdrawn the entire credit amount you can choose to pay it back in full amount or keep a certain percentage as debt which will be carried forward to the next payment. Although this system of credit is good for immediate capital requirement, it is also a little dangerous as you might end up accumulating a lot of debt.
5. A charge credit
In this case, your company will be given a certain amount of credit that you can use, similar to a revolving credit. But here, the lender demands a full payment of the total balance every month. Hence, you cannot carry forward any unfinished payment. This is a better and safer system of credit as your company then eliminates the risk of accumulating debt.
Why is business credit so important?
Some of you might ask that if personal credit already exists and one can borrow money individually, why is business credit required? The simplest answer to this question is : keep your business and your personal life separate. It is very important to draw a line between what is professional and what is personal to maintain ease and fluidity in your work.
First of all, the amount of money you borrow for your business will affect the amount of money you can borrow for your personal needs like a house or a car. Lenders look at your income to determine how much loan they can offer you and if you continue to borrow for your business you might not have anything left over to use for you and your family.
Secondly, if your company is doing well in terms of repayment of loans, then your personal credit score will go up. But if your company starts facing financial problems, it is again your personal credit score that will be affected.
Just like personal credit, business credit must be given importance. If you are planning to invest money into your business, you will sooner or later require loans to finance your plans. You might also come across unforeseen circumstances like sudden shortage of capital which is needed on an immediate basis in which case having good business credit can help you acquire loans faster and get your work done.
The creditworthiness of your company determines what kind of funds you will be eligible for in the future when you need it. So if you are planning to expand your company, it is better that you start planning how to increase your business credit to ensure a safe future for your business.
Banks and other money lenders look at your creditworthiness which determines whether you will be able to pay back the money in time. If your business credit is good, money lenders are more likely to give you a better interest rate and a longer repayment term.
How do you get started?
The first step towards gaining a good business credit is to establish your company as a separate legal entity. After that, you must obtain your Business Tax Identification Number, also known as Federal Tax Identification Number (FIN) or Employer Identification Number (EIN). Following that, you can open an account in your company’s name.
Having a good business credit is the key to maintaining a good and strong business and therefore investing in business credit is a foolproof plan in ensuring the safety of your company in times of struggle and difficulty. We hope that this article helped you understand the mechanisms of your business better!