The ability to buy things now rather than later is a luxury not everyone enjoys. Many people struggle to get credit either because of past financial difficulties or due to a lack of credit history. If you’t have the cash to buy the car, computer, or other big-ticket item you need, business credit may be the answer. This article will explain what business credit is, how you can build business credit and why it’s important.
What Is Business Credit?
Business credit refers to a person’s ability to repay a loan by using the assets of a business. It’s not the same as personal credit, which is based on your ability to repay a loan using your own income or assets. Unlike personal credit, business credit is not a right but a privilege, so you’ll have to apply for it. The three main components of business credit are your business’s creditworthiness, the credit agreement you enter, and the amount you borrow. Your business creditworthiness is how likely you are to repay your loan, and it’s determined by a combination of several factors including your business’s financial health and your personal credit history.
Why You Should Build Business Credit
Building a business credit history gives you added flexibility in your business finances. If you need to take out a loan, build or purchase facilities, or hire new staff, you’ll need financing. Lenders may be hesitant to work with a new business, or they may be reluctant to loan money to an unproven business owner. In these cases, lenders might require collateral or place a high interest rate on the loan to protect themselves against the risk of default. For banks or other financial institutions, business credit is a way to mitigate risk. If you have a proven track record of managing a stable business, they may be more willing to loan you money as an established business owner.
Factors That Affect Business Credit
- Age of your business: Newer businesses may have a harder time getting approved for business credit than older ones.
- Your business’s financial health: Lenders look at your business’s financial health—such as the amount of revenue it generates, the amount of cash flow, and its debt-to-assets ratio—when determining whether to approve your application.
- Your personal credit history: Lenders will also look at your personal credit history. This includes any past business credit you’ve had, payment history, and any late payments or collections.
- Collateral: Lenders may require collateral to make sure they get their money back if you default on the loan.
- Credit agreement: The credit agreement determines the amount of credit you receive, the interest rate, and any due dates.
- Other loans or lines of credit: If you already have other loans or lines of credit open, lenders may view that as a sign that you’re managing your finances well and increase your creditworthiness.
Business credit is an important component of starting and running a successful business. Although it’s often associated with larger companies, small businesses can benefit from building a credit history too. If you’re a new business owner and don’t have a credit history, or if you’ve been turned down for business credit, it’s important to understand what went wrong. To know more, you can visit the site of The Business Cowboy. By identifying the reasons for rejection, you can improve your business credit and open up new financing options.