How to Use Business Credit to Your Advantage

Business credit can be used for when times are tough, but mainly it is used to help you grow or to even out your cash flow. Either way, trying to run a business without access to credit can make things difficult. With that in mind, here are some ideas on how to use business credit to your advantage.

What is Business Credit

First things first, business credit covers a range of options offered by banks and financial service companies for businesses big and small. While the owners of some small businesses will need to provide their personal detail to when first opening business credit lines, these lines are not tied to the owner’s personal credit history.

Business credit is based on the ability of a business to repay the balance as well as any fees or interest. Another thing differentiating business credit lines from personal credit lines are the restrictions on what the funds can be used for. For example, most business credit lines won’t let you use the funds for an all-expenses-paid trip to Disney World.

Getting a line of credit approved can be hard for a business, especially from banks. But in recent years several alternative lenders such as have come onto the scene. These lenders understand the needs of small businesses and know how to get to get them financed without the hassle of going to a bank. Just remember one golden rule when using business credit – that is short-term loans should be used for short-term needs.

Advantages of Business Credit

Business credit has several advantages. These include more flexible payment terms, lower costs, keeping your personal credit clean, and building a company credit history.

With regards to flexible payment terms, more and more business credit lines are not set up to be repaid monthly. Instead, you repay the loan or line daily as a percentage of sales. The advantage is that you don’t need to build up excess cash in your bank account to meet a pre-scheduled payment. Remember to check how interest is calculated when repayment is made daily.

Another advantage of business credit is the lower cost when compared to other types of credit. This does just include the interest rates, but also the risks such as using your home as collateral for a business loan.

This brings up a thing advantage of business credit – it is separate from your personal credit history. You see businesses tend to be heavy users of credit and by not separating your businesses credit you risk ruining your personal credit. As such, you want to make sure that you don’t mix accounts.

Finally, you can’t access lines of credit for your business if you don’t have a good credit history to begin with. This starts by setting up credit lines with your suppliers, making sure they report your payment history to business credit agencies, and then to get credit cards or credit lines in the name of your business. By doing this you are working to build a business credit history.

What Are the Options?

While getting loans from banks has become more difficult there are several options which you can use to use business credit to your advantage. These options include Small Business Administration (SBA) Microloans (also known as 7(a) loans), invoice factoring, asset-based lending, or merchant advances.

The SBA Microloan program was set up to help small businesses to get loans up to $50,000. While the approval process can be tedious, these loans are guaranteed by the Government and you not only get the funds you need but you will also receive consulting services designed to help your business.

Invoice factoring is another business credit option, especially if you have customers with excellent credit and you are looking for ways to smooth out your cash flow. By using invoice factoring, you get the cash you need today for working capital. Though one potential downside is that you should factor in the cost of this financing into your pricing.

Asset-based lending works just like it sounds. This form of lending looks at the ‘Assets’ on your balance sheet, such as inventory, accounts receivables, real estate, and machinery. By pledging these assets, you can get the money you need for your business.

Finally, there are merchant cash advances. These loans look at your monthly credit card receipts and then issue you a loan based on these sales. The plus of merchant card advances is that it will allow you to get cash fast. However, these loans can be expensive and need to be used tactically.

Business Credit.

Anne Lawson is a British writer who keeps her eye on business and trending issues that affect us all. She loves to delve into the real story and give us interesting tidbits we might otherwise miss.