What is Business Credit
If you ever thought about starting a business, or you are currently a startup, own an existing business, or invest in real estate, then you’ve probably heard the phrase “business credit.”
But what exactly is business credit? Happy you asked, because I’ve got one short answer, and one really long one. Here’s my official definition:
Business credit is the ability for a company to obtain borrowed money that it can use to purchase products or services which is based on the trust that payment will be made in the future.
You get business credit from a credit grantor, whom you agree to pay back the amount that you spent plus any additional interest charges or fees, at an agreed upon time frame.
Now that you know the definition of business credit let’s go over the five types of business credit your company can obtain:
- Revolving business credit – With revolving business credit lines you have a set credit limit which enables you to make charges up to that limit. You have the option to either pay your balance in full or carry a balance (revolve the debt) and make a payment. Most business credit cards are a type of revolving credit for a company which you can get either unsecured or secured.
- Charge credit for business – With charge credit your company also has a set credit limit but the main difference is that you have to pay the total balance in full each month. This prevents your company from accumulating debt since you are unable to revolve debt.
- Installment credit – With this type of business credit a lender loans your company a set amount of funds and you agree to repay that amount and interest in a regular monthly installment with a fixed payment for a set length of time. A business loan and commercial auto loan are typical examples of installment credit.
- Service credit – Any agreements your company has with service providers are all credit arrangements. You receive internet service, cell phone service, web hosting, etc., with the agreement that your company will pay for the service every month. Keep in mind not all service credit accounts are reported to the business credit reporting agencies such as Dun & Bradstreet.
- Trade credit – Trade credit which is also known as vendor credit or supplier credit, is when a business allows your company to buy products or services up to a set credit limit and pay for the total outstanding amount on the invoice within 10, 15, 30 or 60 days depending on the agreed upon net terms.
Why do you need business credit?
Business credit is necessary if you plan to use credit to make daily or major purchases for your business, such as marketing expenses, travel costs, equipment or inventory, or you want to be able to take advantage of the convenience that credit provides. It’s also important to realize that business credit goes beyond just purchasing power, in that your company’s creditworthiness plays a crucial role in future funding opportunities.
Business credit, like personal credit, is what you should build before your company actually needs it. The fact is your business may need access to credit to cover unforeseen expenses so it’s best to plan ahead and start the business credit building process now.
How do you get started?
The first step in establishing credit in your company’s name is to structure your business as a separate legal entity. If you haven’t filed the paperwork then you’ll need to do that before anything else.
Next, you’ll need to obtain your business tax identification number also known as a federal tax identification number (FIN) or an employer identification number (EIN). Once you’ve done this, you can open a business checking account in your company’s name using the EIN number.
For more information on how to go about this, check out our business credit building system.
Remember, business credit is not only about getting access to financing; it has become the driving force for setting terms on business lines of credit, business loans, insurance premiums, lease payments and trade credit. With a strong business credit profile you can receive more favorable rates and terms giving your company optimal use of its funding ability.
Until next time…
Ready to start building business credit? Become a member of my Business Credit Insiders Circle and gain access to a proven step-by-step business credit building system. A system that provides you access to vendor lines of credit, fleet cards, business credit cards with and without a PG, funding sources and lenders that report to all the major business credit bureaus. Submit your name and email below for details and receive a free business credit building audio seminar ($497 value) =>
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About the author
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, Business.com, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in ‘Fox Small Business’,’American Express Small Business’, ‘Business Week’, ‘The Washington Post’, ‘The New York Times’, ‘The San Francisco Tribune’,‘Alltop’, and ‘Entrepreneur Connect’.