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Business credit measures how likely a business is to repay loans and make timely payments based on its history. By making your company eligible for loans and building a solid credit score, you can obtain additional capital for investment and supercharge your growth.
As your business gets opportunities to grow, you may need funds beyond your savings. To this end, loans can assist you in boosting your company. However, financial institutions often have strict criteria for lending.
In this article, we discuss the types of business credit and the steps you need to take to start building your company’s credit.
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Types of Business Credit
There are three main types of credit a company can have.
1. Credit Line
A credit line allows a company to take out one or more loans at any time under a maximum limit. For instance, if you have a credit line of $1,000 and take a $500 loan, you could take another $500 before paying off the first loan. Then, in our example, paying back all your loans would reset you back to your credit line of $1,000.
2. Business Loan
A business loan is a single loan that a company can take out and pay back with interest. The amount you are eligible to take out highly depends on your existing business credit. It is important to note that taking out these loans does not affect your prospects for your personal loans.
3. Business Credit Card
A business credit card allows you and your employees to cater to day-to-day expenses. Note that this type of credit card will only affect your business’s credit, not your personal credit. Using it regularly and making timely payments can also help your business build credit just as a regular card builds your personal credit. Generally, a business credit card has a higher interest rate than loans and credit lines, making it useful for minor expenses but not a substitute for larger loans.
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How to Start Building Business Credit
Educating yourself through business credit classes can be especially helpful in assisting you with credit building. However, until you can do that, here are the steps you need to start otherwise:
1. Creating an Entity
Your company must be registered as a corporation or a limited liability company (LLC) to begin building credit. LLCs need not be registered through a federal agent, however, so you’ll only have to contact your local state agency. Some states even have the option of applying online. To be eligible, you must prove that you have employees and conduct business in the said state.
2. Demonstrating Positive Cash Flows
You’ll have to work toward building and maintaining a positive cash flow to increase your credit. This will also make your business eligible for loans and credit lines.
3. Using Collateral-Secured Loans
In order to take out business loans, it is necessary to have some form of collateral that the lender can take if you cannot pay your loans. This gives lenders the confidence that they will not lose their investment. It is important to realize that going for collateral-secured loans can mean lower interest rates and better loan terms than unsecured loans.
4. Making Timely Payments
Make sure to pay your company’s credit cards, credit lines, and loans on time to build credit and secure better deals for loans in the future. You can also get a credit-building loan. This can help you both increase your credit and also be an additional capital source.
Building business credit generates additional capital for your business which can help with growth. This is especially true for smaller and newer startups that may not have the backing that larger companies have. It is essential that you focus on building credit as soon as you launch your startup to secure the funds necessary for expansion when you need them.
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