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Business Credit: Definition And Why You Need It



As an entrepreneur, you will undoubtedly encounter the term "business credit" at some point. It is a financial asset that you should not underestimate if you want to maintain a healthy cash flow. However, most business owners do not know what it is and why they need it.


Business credit is a measure of a company's ability to borrow money, obtain financing, and conduct financial transactions based on its financial track record. Healthy business credit will help you get approved for loans and other types of funding.


To maintain a strong business credit, businesses need to pay bills on time, manage debt responsibly, and regularly monitor their credit reports for accuracy. But what are the benefits? You'll learn about that and more in this article.


What Is The Meaning Of Business Credit?

Business credit is an estimate of a company's risk or ability to repay a loan or other financial commitments. A credit score is given to a business credit report based on payment history, debts, and credit utilisation, as well as general information about the company and information available in public records.


For example, if your company needs extra working capital to run its operations, you could ask for a cash flow loan. As part of the application requirement for the loan, lenders will look at your business credit for references on your business's finances.


Whether you are applying for a loan or companies are granting credit to you, your business credit may be the deciding factor in whether the outcome is positive or negative. A number of factors determine your rating, but here are a few of the more important ones:

  • Country of incorporation

  • Date of incorporation

  • Legal Form

  • Shareholders/Owners Activity

  • Capital (if required)

  • Payment History

  • Company Size

  • External Risk Factors

  • Length of Credit History

  • Public Records (Bankruptcies & Judgements)

  • Turnover

  • Business Growth

  • Profit/Loss

  • Sector

  • Trade References

Note: Depending on the area in which you operate, several industry requirements may affect your company credit score.


Why Do Businesses Need Business Credit: 7 Benefits Of Business Credit

Every business thrives on funding. Businesses with sufficient funds or capital can meet their demands, make good investment decisions, and respond successfully to changing market conditions. So, maintaining a strong business credit profile has various advantages for your business.


Here are some significant benefits:


1. Gives Strong Financial Foundation

Having access to credit can help you cover the costs of running your business, especially during tough times. If you need to make a big purchase or cover an unexpected expense, having a healthy business credit can help you secure the financing you need.


2. Strengthens Your Business Reputation

Your business credit tells potential partners, investors, and lenders that your company is financially responsible and stable. This can help you build trust and credibility, which can lead to more opportunities for growth. In other words, business credit can be a valuable asset in helping your business succeed.


3. Helps You Save Money On Interests

Lenders often offer lower interest rates to companies with a strong business credit score. This can help you save money on the cost of borrowing, and it can also make it easier to pay off your debts over time. Additionally, some lenders may waive certain fees or offer other benefits to companies with a good business credit score.


4. Gives You More Flexibility In Managing Your Cash Flow

With access to credit, you can better manage your company's expenses and make sure that you have the funds you need to operate. You'll also have the flexibility to make larger purchases or investments, knowing that you have a safety net in place if something unexpected happens. Plus, having access to credit can help you take advantage of opportunities that arise, even if you don't have the cash on hand.


5. Protects Your Personal Credit

When you use business credit instead of personal credit, it keeps your personal finances separate from your business finances. This helps to protect your personal credit score, even if your business runs into financial difficulties. So, if you're ever in a situation where your business is struggling, your personal finances won't be affected.


6. Strengthens Your Relationship With Suppliers

Many suppliers will check your company's credit score before they agree to work with you. By having a good business credit score, you'll be more likely to get favourable terms from your suppliers, including longer payment periods and discounts on bulk orders. When your suppliers trust you, they're more likely to work with you on a long-term basis.


7. Makes It Easy To Get Funding

When you're ready to take your company to the next level, having good business credit can help you secure the financing you need to grow. This could include getting a loan to open a new location, hire more staff, or launch a new product or service. A good business credit score can also help you attract investors and partners who are interested in supporting your company's growth.


What Are Examples Of Business Credit?

Business credit comes in different types, and some examples include business loans, business credit cards, etc. Business credit cards allow companies to make purchases on credit, build a credit history, and often offer rewards and benefits.

Building and managing business credit is crucial for securing financing, managing cash flow, and growing a successful enterprise. Here are examples of business credit.


1. Business Credit Line

A business line of credit is a financial arrangement that provides a business with access to a predetermined amount of funds that it can borrow on an as-needed basis. Business owners typically access these funds through a business checking account or mobile app.


A business line of credit is revolving, which means that once you repay the borrowed amount, the credit line becomes available again for future use. This makes it a renewable source of financing, similar to a credit card.


Business lines of credit typically require monthly minimum payments based on the outstanding balance. These payments may consist of both principal and interest or, in some cases, just interest. Paying down the balance replenishes the available credit for future use.


2. Business Loan

Businesses can apply for loans from banks, credit unions, or online lenders to finance various activities, including expansion, working capital, or equipment purchases.


In business loans, the terms are less flexible than a business line of credit. If your loan application is approved, you'll get the full amount upfront. You'll pay this lump sum over time with interest. Business loan terms vary by lender, credit history, and loan size. Some need a personal guarantee to repay the loan if the business cannot pay.


3. Business Credit Card

Many financial institutions offer business credit cards that allow companies to make purchases on credit. These cards often come with features tailored to business needs, such as expense tracking and employee card management.

Before getting a business credit card, carefully compare the features, rewards, fees, and terms of many business credit cards to choose the one that aligns best with their company's needs and financial goals.


Also, responsible card management, including making on-time payments and avoiding excessive debt, is crucial to maximising the benefits of a business credit card while maintaining a strong financial position.


Takeaway

The need for business credit is clear, whether it's to finance day-to-day operations, seize growth opportunities, or weather unforeseen financial challenges. It allows businesses to maintain a clear separation between personal and business finances, safeguarding personal assets and providing legal and financial protection.

If you have a healthy business credit and want to get full benefits, contact Biz Credit Devyn to help you get business funding and other opportunities available to you.

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