Published By Janet Gershen-Siegel at August 16, 2017
Written by Janet Gershen-Siegel
Every small business needs to borrow money at some times in its history. Whether that is to take advantage of a real estate or equipment deal, or to cover payroll, or ride out lean times, it does not matter. A small business just needs money and does not have the cash on hand at the time it needs those funds.
Credit lines are the amount of credit available to your business, often when you have a business credit card. Business loans are, as you might expect, money from lenders which must be paid back with interest. While you are wondering how does business credit score work, the truth is, both of these options are factors. They are both answers to questions about what affects business credit score. And they are both places where to establish business credit.
Credit is a lot like small, short loans. However, the advantage of credit – a huge advantage – is that interest does not start to kick in until you are late with the payments. If you are never late with paying back credit, you are not going to be charged any interest on it. Furthermore, credit lines can come from a lot of different places. Some of these less traditional credit lines have far less stringent requirements than others – and many of them are a lot less strict about your credit history than business lenders are.
Trade credit, for example, is an agreement between your small business and a local company where you do a lot of business. For example, if you always get your company’s office supplies from a particular store, look into getting trade credit with them. Often trade credit provides better payback terms. Hence you might have an extra month or more to pay before interest starts to kick in.
Another type of credit line is one we are all very familiar with – the credit card. In this card, you want a business credit card, in your business’s name and not your own. In general, the credit card company or bank will want a personal guarantee to go along with granting you a business credit card. This is because their credit history with you as an individual is often a lot longer and better known to them than your credit history with them as a small business owner.
A personal guarantee means that you are personally responsible for paying back your small business’s debts. And if your business falters and you can’t pay, then that means that your own personal assets are going to be on the line, such as cars and the like.
Therefore, when you get these sorts of business credit cards, make sure they have a personal guarantee removal feature built right into them. Also make sure to not use more than about one third of your business’s total available credit on them. And, as with all forms of credit, make certain to pay on time, every single time.
For a comparison of the business lines that are out there, we love this article from Fit Small Business.
While one issue with business loans is interest, another is whether you can get one at all. For new businesses in particular, your corporate credit will be poor and, by definition, have very little history behind it.
As a result, lenders are going to be less than enthusiastic about offering up business loans. After all, they have no idea whether your company will be able to pay back the loan. They will also, often, take out a UCC blanket lien if they do give you a loan. This is a notice which goes on your credit report. It shows that the lender has an interest in all of your business’s assets until you pay off the loan in full.
Therefore, many of them will also require personal guarantees. If they do not, then you are generally looking at unsecured business loans, and those come with hefty interest rates.
These kinds of business loans are can be short term (so you need to pay them back fast). Or they may be receivables financing (where you get a loan based on business you expect to be coming in because you have outstanding invoices your own clients have not paid to you yet). Or they can be merchant cash advances. These all come with interest rates which are often 40% or higher.
Either way you go your business credit score will be affected by your repayment habits. Make sure those are good ones. Learn more here and get started toward funding your business without emptying your wallet.