Back in the day, after leaving the banking industry to becoming a business loan finance advisor, I came across a lot of new things and the technical terms we use in the financial business arena. Building a Business Credit funding profile was one of them that became a priority for most small business owners that I was working with.
Sometimes even grown-up businesses don’t know about business credit (or even building business credit profiles), and if you’re a start-up company or business, you will want to learn as much as possible about Business Credit at the beginning of your journey will definitely help you in the long run.
In this article, you’ll learn everything you need to know about Business Credit and how it helps businesses.
Blog content is as follows:
- What is Business credit?
- Difference between Business credit and Personal credit
- Why is credit important in business?
- What is a business credit score?
- How can we build business credit?
- The actual value of small business loans
- How can a small business loan help your business?
- Credit union v/s banks for small business loans
- Coronavirus period small business loan
- Conclusion
Let’s jump right in and discuss all of them in detail.
What is Business credit?
As the name suggests itself, business credit is the credit of a business or company. Now the question arises,
What is the credit of a company?
Just like we’ve personal credits, business credit is the credit in the name of the business, and it’s based on the company’s ability to pay, not on the business owners.
With business credit, business builds its own credit profile and credit score for its EIN.
In simple words, Business credit is your company’s potential to pay back loans or any borrowed money.
A good business credit rating can help you find the right investors and, thereby, the funds needed for the company’s growth.
Investors, loan provides, or any financial organizations use the business credit score to judge your company’s reputation as a borrower.
So, in the end, it would depend on your business credit score, whether you’ll get loans (funding) or not.
There are tons of agencies and companies which calculate Business credit, and all have them use different methods to calculate it.
The higher your credit score is, the better the position your company is.
Your company’s past records play an essential role in the calculation of your company’s credit.
Difference between Business credit and Personal credit
As a business, you should not confuse between the two, and understanding the difference between the two is very important.
The government uses the social security number to keep track of your personal income. In contrast, EIN (Employer identification number) is used by the government to track your company’s revenue and tax purposes.
In many cases, you might need to share your personal credit information along with Business credit; for example, while applying for a Small Business loan, the lender might ask for a personal guarantee.
Under the Fair credit reporting act, a lender can ask for the personal credit history for Business lending purposes.
Why is credit important in business?
By now, you should have drawn a rough picture of the Business credit in your head, and now we’ll look at the pros of having a good credit score.
Whenever you apply for personal loans from a bank, the bank asks for the documents that tell them about your income, or we can say Personal credit, similarly, whenever you’ll apply for a business loan the lender will look at your business credit.
So, it becomes very important to maintain a high business credit, especially for small businesses. If your company has a high Business credit, then there are high chances that the loan will get approved.
The credit score tells the lenders whether, in the past, your company has repaid the borrowings on time or not, and on this basis, your application may be either accepted or rejected.
If your company has an excellent credit score, depending on the lender, you might redeem lower interest rates on financing.
Advantages of Business credit are not just limited to loans and lenders; many companies face issues with the repayment terms with their vendors and suppliers, a good Business credit would generate opportunities for your company to secure better repayment terms with the vendors and suppliers.
Being a company with a high credit displays a trustworthy image of your company in front of the suppliers, and it can help you redeem flexible repayment terms.
Having a high Business credit would also help you secure the personal credit, as long as your business credit is strong enough, you won’t need personal credit for the Business expenses.
In case, you’re using personal credit for the business purchases, the credit utilization will increase, and with time your personal credit score will decrease.
Researches have shown that the primary reason behind the failure of a small business is lack of funding, and most of them failed to get funding because they did not have good Business credit.
It shows how much do banks and lenders rely on your business credit score and why it’s important for your company’s growth.
What is a business credit score?
A business credit score is a number that is used to represent the business credit, or we can say it’s the number of marks (out of 100) your company scored after analyzing all the factors involved in maintaining the Business credit.
The maximum Business credit score a company can have in 100, and the higher it is, the better it is. Having a high business credit score means your company has high business credit.
A credit score of 80+ is considered a good credit score but having a score of less than 80 means your company needs to do better and improve this score. See Credit Mastery for methods that get higher scoring fast!
It is measured based on a number of like,
- Repayment history with the lenders, vendors, and suppliers
- Company’s involvement in Tax liens or bankruptcies
- Date of State Registration (Incorporation or Organization age of company)
- The size and type of company
You can find different credit scoring firms or companies that calculate Business credit scores; we’ll discuss a few later in this article.
Again, we should not confuse between personal credit score and business credit score. Both are different and calculated for personal and business credit, respectively.
How can we build business credit?
Building business credit takes time and effort; it’s not a task to be done overnight. In the book or Credit Mastery Seminars you will learn how to accelerate your profile buildout with successful reporting tradelines along with advanced business credit techniques for maximum funding fast. Here we have a few basic steps or measures you must follow for building your initial Business credit:
- Incorporate your business
Incorporating your business is very important for separating your personal credit and business credit. Get incorporated or become an LLC (Limited Liability Company) as soon as possible.
If you don’t do it legally, your personal and business credits will remain attached, and you won’t be able to redeem the benefits of Business credit.
- Get a Business credit card, phone number and bank account.
Apply for a Business bank account, get a business phone number and credit card. The business bank account must be in the name of the company or business.
You’ll be paying all the bills and borrowings using this business account or credit card; it would separate the personal and business credit.
Use your business phone number to receive business calls and make sure the phone number is listed in the directory so that it can be found easily.
A business credit card is similar to a credit card we use in our day to day life; we use personal credit cards for making payments in shops, malls, etc. while a business credit card is used for making payments related to the company’s projects, loans, etc.
You can have more than one business credit card. Still, you should have at least one and opening a business credit card with a company that reports to the credit reporting agencies is a very smart way to establish the business credit.
- Get EIN (Employer Identification Number)
Indian Revenue Service (IRS) issues a unique nine-digit number (EIN) to every single business in the U.S., and the government of the U.S. uses this number for identifying the business and tracking the taxes.
Like we have Social Security Number (SSN) that is issued to every person and used by the government to identify a person and track the taxes, similarly, EIN works for a Business or a Company.
Even if you’re not a U.S. resident, you might need EIN in a case; you’re receiving online payments outside the country. For example, platforms like PayPal that we use for cashflow might ask for EIN.
Now the big question is,
How can I apply for EIN?
You’ll need to fill SS-4 form to apply for EIN, make sure you read the instructions page carefully before submitting the form.
We can also apply for EIN online, fax, or by a telephonic call, but there are certain conditions you must know before applying through any of these methods.
- EIN online: Only for applicants in the U.S. or U.S. possessions
- By Telephone: Only for applicants outside of the U.S. or U.S. possessions
- By fax or mail: No Conditions
I won’t discuss in much detail now; you can find all the needed information on the Instructions page of SS-4 form.
Make sure you apply through a single method, otherwise, your application will be rejected, or you may get more than one EIN for your company.
- Open a Business Credit File
A business credit file is a report card of your company that tells how well your company manages finances and based on it, your business credit score is calculated.
Now the question is,
Who creates this file?
Several credit reporting agencies calculate Business credit scores and create credit files for different companies. There are chances that some agency has already built a credit file on your company and you won’t even know it (it’s completely legal).
Some major Business reporting agencies are:
- Dun and Bradstreet
- Experian Business
- Equifax Small Business
- Data Furnisher – Microbilt
- Data Furnisher – Lexis-Nexis
So, before applying for a business credit file on any reporting agency, check whether your company is already listed on some agency or not.
If you find your company already listed, review the data being reported on the company. If the data is not accurate, you ask for an update from the respective agency.
In the second case, if your company is not listed yet, then you can apply for a business credit file on these reporting agencies. Your vendors and suppliers can help in building good credit, they report to these agencies and depending on these reports, your business credit is calculated.
Not all the suppliers and vendors report to these agencies, so working with the supplies that report to the business credit reporting agencies can help in maintaining a good credit score for your business.
You can even encourage your suppliers or vendors to become a trade reporter with an agency.
- Establish good relations with your Vendors, Suppliers or Lenders
As we discussed earlier, vendors and suppliers can act as potential assets for building business credit. Establish healthy relationships with the lenders, work with at least 4 to 5 vendors that report to the agencies.
Good relations will let you avoid a high amount of upfronts for the items and services you buy. Also, you can get more flexible terms with your lenders.
- Pay the vendors on time.
Payment history of a company is considered as one of the significant factors while calculating the business credit score; you must pay your lenders or suppliers on time to get a good credit score.
Many business owners don’t realize the importance of paying bills on time if your company pays on the time it reflects that your company is reliable and can manage its finances effectively, late payments will negatively affect your business credit score.
Paying on time can get you a good credit score, but if you pay your vendors or suppliers early, you may get a higher credit score.
- Use Business credit
Use business credit for making all the company related purchases, for example, paying your vendors, suppliers or lenders. The idea behind using business credit is that it would separate your personal credit and business credit.
Business credit will help you maintain the cash flow, use business credit cards for making payments and manage your finances accordingly.
If your company is effectively managing its finances with Business credit, then credit reporting agencies see it as a positive signal, and you may get a good credit score.
- Monitoring your business credit
It’s very important to monitor your business credit reports, either make a specific team for it or assign the work to some specialist.
Analyze your company’s report created by the business credit agencies and find out the errors and to fix them ask the agency to update the report.
If you’re a small business, you won’t need a separate team of analysts; you can even do it yourself. Analyze the report a couple of times in a year and if required, get it corrected by raising a dispute with the reporting agency.
Researches show that most of the errors are found in reports of small businesses, so it becomes very important for growing businesses to get those errors fixed.
The actual value of small business loans
It takes time and investment for any business to grow, and when someone does not have the money required to invest in the business, business loans are there for help.
When it comes to loans or borrowing money from lenders, many people get scared and ask a lot of questions, but it’s very important to understand that loans are not that complicated and we should get one if we need one.
Even the government has invested in the policies that could help businesses grow, and you can get loans for your business at very low-interest rates.
We won’t discuss in much detail about loans, but we’ll discuss in detail why small business loans are valuable today and how to choose the best one for you.
What is a small business loan?
It’s important to know what amount of loan is considered as a small business loan and what are requirements to apply for a small business loan.
In simple words, a small business loan is a loan offered to small businesses or start-ups. Different lenders can have different terms and conditions for the eligibility of the applicant, and you must read all the terms before applying for one.
For example, if you want to apply for SBA loans, your company must have less than 500 employees and less than $7.5 million in revenue.
We will discuss SBA loans later in this article, so don’t worry if you’ve heard this term for the first time.
Types of Small Business loans
There are several types of small business loans like we get to choose between different plans when we apply for personal loans. Similarly, small business loans also come with different choices for you.
Here are some types of small business loans:
- Installment loan
Any loan which is scheduled to be repaid with regular payments or installments is called an Installment loan; it is one of the common and easily available loans.
Generally, the borrower has to pay monthly installments, but the terms may vary from lender to lender. Installment is the portion of the borrowed amount to be paid and the interest charged on it.
Auto/Vehicle loans, Mortgage loans, Personal loans are some examples of Installment loans.
Interest rate loans are fixed-charged loans which means that the interest rate charged would remain the same throughout the term. The interest rate will be decided at the time of borrowing or contract signing. So, the borrower could manage his finances and repay it without any due.
Installment loans have very flexible terms; for example, you can set the loan amount or installment schedule as per the ability of the borrower to repay the loan.
As we discussed, the lender’s policies may vary, so make sure you read the contract carefully before signing it.
Installment loans are easily accessible through Banks, Credit unions and online lenders.
- SBA loans
I mentioned the term SBA earlier in this article, and now it’s the time to dive deep inside it. So, before discussing the SBA loan and the procedure to get it, let’s discuss a few important things you need to know.
What is SBA?
SBA stands for Small Business Administration; it’s a U.S. agency that provides support to small businesses and start-ups. It was made to boost the economy by assisting small businesses and entrepreneurs.
This agency offers a variety of services to small businesses, including services like government contracting, access to capital and much more. One of it’s most popular services is SBA’s loan guarantee program.
How do SBA loans work?
SBA doesn’t make direct loans to a business or company, it gives a guarantee to the lenders that your company repays the loan, and their guarantee eliminates the risk for the lending partners.
So, basically, you’re not applying for an SBA loan, you’re applying for a commercial loan with SBA guaranty. You’ll need to qualify all the requirements before applying for an SBA loan.
The government can change SBA policies anytime when needed, so don’t rely on the policies updated in the past. You can find a list of participating lenders on the SBA website; most of the time, SBA loans are through banks.
Qualifying terms for SBA
We’re not discussing all the terms here, but some of them are as follows:
- Your company should be registered
- The company must have less than 500 employees
- Business must have less than $7.5 million of revenue
- Your business must be physically based in the U.S.
- Your company should have a good credit score.
There are current terms, and these can vary with time as the government feels the need to change these. So, please check the terms on the SBA website before applying.
- Business Lines of credit
It provides instant access to funds and flexible credit options. Business lines of credit work similar to the credit card, you’ll have a maximum credit limit, and you can spend up to that limit.
The lender will charge interest on the amount borrowed, and you’ll have to repay the amount with installments, similar to the process of Installment loans.
You can apply for business credit lines through banks and credit unions; in some cases, online lenders also provide access to business credit lines.
- Short-term loans
As the name suggests, short-term loans are the loans that are to be returned in a short period of time. You can use short term loans in-case you need instant money or in case of some emergency.
These loans are very quickly accessible, and the best part is your company doesn’t need a high credit score to apply for these loans.
Short term loans come with very high-interest rates so one should apply for them in case of emergency only. Try to avoid it in most of the cases keep it as a side option.
These loans don’t require a long application process, so you can get a short term loan quickly as compared to others.
- Equipment loan
A company’s growth is followed by the growth in the number of its customers’ and simultaneously production rate will increase.
For increasing production, you’ll need more and more equipment and funding. You can apply for an equipment loan for purchasing new equipment.
Equipment loan provides access to the use of new equipment immediately and pays for the new equipment later. Similar to other loans you’ll need to repay in installments along with the charged interest.
There are many other Small Business loans, but we won’t discuss them here in this article, you can check them yourself. Some of them are Invoice financing, Merchant cash advances, Personal loans for business, Microloans, Crowdfunding and Peer to Peer loans and Commercial real estate loans.
Where to Get Small Business loans
Now the question is who should you approach for a small business loan there are different places where you can borrow money from, we even discussed one of them earlier in this article (SBA), and now we’ll discuss several others.
- Online Lenders
You can find tons of online lenders that offer small business loans and borrowing money from online lenders is a very easy and quick process as compared to others (banks).
- Community Banks
Community banks are smaller than Commercial banks and are owned and operated by locals. The best thing about community banks is that they don’t look after your credit score. Instead, they check your credit history. So, even if you don’t have a very good business credit score, you can get a loan from community banks.
- Commercial banks
You can even borrow money from commercial banks, but unlike community banks, commercial banks will look after your business credit score. If it’s not good enough, your application might get rejected.
In contrast to community banks, commercial banks have low-interest rates, but it’s not an easy task to qualify for a commercial bank loan.
- SBA loan
We’ve already discussed SBA and the qualification procedure for SBA loans, you can scroll up and check the details.
How to qualify for a Small Business Loan
You cannot predict whether your loan application will get approved or not, but there are certain measures or steps that you should follow for qualifying.
- Start building your Personal and Business credit score.
By now, you must have understood the importance of credit in business, both personal and business credits are equally important, and one should maintain good personal and business credit scores.
70+ business credit score is considered a good credit score, and 80+ is considered an excellent score with Experian or Equifax (Dun and Bradstreet Paydex TM scores should be 83-85). There are several websites where you can check your company’s credit score, and as we discussed earlier, you can also ask the credit report agencies to fix the errors and update the score.
- Read the requirements carefully.
Different lenders have different terms and interest rates; your job is to read the requirements carefully and then apply for the loan; it may sometimes happen that your business doesn’t qualify the lender’s requirements.
Loans backed by SBA are much harder to redeem and qualify for, so it becomes very important that you try to maintain a good business credit from the very beginning of your business journey.
Solely business credit is not enough for getting a loan; you’ll need to submit various financial documents for completing the official paperwork.
- Build a Business Plan
Any lender would like to know about your business before lending your funds, and your responsibility is to present your company’s business plans, products, services and future projections.
A business plan is used as a medium to convince the lender that you’re going to be a profitable company, and the loan can help you achieve it. In the business plan, don’t forget to mention your business goals, future projects and upcoming products.
- Collateral
Collateral is a property or an asset that a borrower offers the lender as a security for the loan, in case, the borrower is not able to repay the loan lender can legally take over the borrower’s property.
Not all the lenders ask for collateral, but most of them do, and it’s not a big deal, so don’t hesitate if your lender asks for collateral.
Collateral can be real estate, equipment, inventory or anything else; it depends on the lender what types of collaterals he accepts.
Credit Mastery will give you solutions and alternatives to providing collateral!
How can a small business loan help your business?
Be it a business or a start-up it requires funding to grow and expand, and there are hundreds of ways to get funding for your business, and the loan is one of them.
A small business loan is a type of loan, and it has several benefits over others. We’ll discuss the benefits of small business loans here:
- Easily Repayable
Small business loans can be easily repaid as banks have flexible terms for these loans; the repayment plans are not fixed; they may change according to the financial condition of the company.
Even EMI’s may increase or decrease according to the company’s cash flow, that is when the company is financially unstable, EMI would reduce. In contrast, in the case of stable cash flow, EMI may increase.
- Low-interest rates
Banks have lower interest rates as compared to the other lenders, and small business loans have even lesser interest rates. So, you don’t need to worry about the high repayments with interest rates.
You’ll find more paperwork and requirements for small business loans with low-interest rates while fewer requirements for loans with higher interest rates.
- Availability
Small business loans are easily available as compared to other types of loans, most of the lenders don’t even ask for collateral while lending a small business loan, this makes it easier for start-ups and small businesses to avail loans.
- Business growth
Small business loans can boost your company’s growth if used carefully, and once your business starts growing, you can easily repay the loan along with the interest rates.
You can purchase new equipment, machinery and increase the production rate by utilizing the loan, which would help your business grow fast.
- Small business loan Tax benefit
I think this is the most interesting benefit one can think of because everyone wants to save their money that goes into tax and a small business loan can help you get tax benefits as well.
Income Tax act states that the percentage of profit utilized for repaying the loan amount is exempt from the tax.
Credit unions vs banks for small business loans
Whether to choose Credit unions or banks for small business loans, like any other thing both the credit unions and banks have pros and cons. Let’s find out which one is the best for you.
If you’re looking for a savings account with high-interest rates you can deposit your company’s funds in credit unions because banks can never match the high-interest rates provided by the credit unions.
Banks offer more financial products as compared to credit unions, banks provide different credit cards, a wide range of loans to choose from, a variety of business accounts and much more. So, in the case of Banks, you get more choices in contrast to the credit unions.
Credit unions don’t care much about credit scores and credit history that makes them more flexible as compared to banks. Banks can easily reject your loan applications whereas the credit unions provide more flexibility and your application may get approved even if you don’t qualify the requirements. So, getting a loan application approved is much easier with credit unions.
Credit unions are not as large as banks, they have limited employees and are smaller in size. So, they don’t provide many online features as compared to the banks. With banks, you can easily transfer funds online, check recent activities online or even apply for credit cards and loans.
You can find banks operating all over the nation but credit unions don’t work the same way, they operate form limited locations and that’s why they are not easily accessible as compared to banks.
These were some pros and cons of both the banks and the credit unions, and one should make a decision after having a look at all of them. Your business needs should match the terms of the one you’re choosing.
Coronavirus period Small Business loan
Covid-19 has hit the world very hard and in such a pandemic we’re trying to do our best and save lives. The government has made several announcements for helping people and taking them out of bad situations.
Small businesses are one of the most suffering sectors in this pandemic and to help them government has announced low-interest small business loans up to $2 million.
Small business owners in all U.S. states and territories can apply for Coronavirus Small Business Loan.
Who is providing small business loans?
US-based organization SBA (Small Business Administration) is proving low-interest small business loans; these loans are offered to the small businesses that have been severely affected by this natural disaster.
The government is providing these small business loans so that the businesses that are hit hard could pay debts and bills.
Are you eligible for Coronavirus small business loan?
This program is designed by the government to help small businesses that have been severely affected economically by this pandemic. One applying for this loan must be unable to secure alternative funding.
SBA and other state officials must have declared a disaster in your area only then you are eligible for this emergency small business loan.
Terms of Coronavirus small business loans
The terms are not fixed; it would depend on the company’s ability to repay, but the maximum time for a company to repay it is 30 years. For small businesses, the interest rate is charged at 3.75%; while for nonprofits it is set at 2.75%.
Conclusion:
- Business credit is the ability of a company or a business to repay its borrowings.
- Personal and Business credit are not the same.
- One should try to keep the business and personal credits separate.
- Business credit will help you get easy loans at low-interest rates.
- A business credit score is a mathematical representation of your business credit.
- A business credit score is calculated based on your past records.
- Your vendors and suppliers can help you in maintaining a good credit score.
- Not all suppliers and vendors report to the credit reporting agencies.
- There are several types of small business loans.
- SBA’s loans are not funded by SBA
- Not everyone qualifies for an SBA loan.
- The U.S. government has announced coronavirus small business loan for helping small businesses
- Coronavirus small business loan has very low-interest rates.
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