There are many different types of business credit available, and it can be difficult to decide which type is best for certain financing needs. So, what types of business credit are the most commonly used, and what purposes are they ideal for?
Credit for Startups
For new businesses, traditional sources of business credit can be difficult to obtain, and the ones that are available invariably require business owners to risk their personal financial well-being by pledging collateral or signing a personal guarantee.
But, there are other sources of credit for new businesses. Vendors and fuel retailers will often offer deferred payment “net” accounts, even to new businesses. At first, they are likely to have low limits and short repayment terms, but they are an excellent means of building business credit.
Alternative lenders are another potential source of financing for startups. P2P lending, for example, allows business owners to borrow a small amount of money from each of their many financiers. Because the risk to each individual backer is low, the qualification criteria is less stringent than that of traditional lenders. Entrepreneurs can also look into factoring, purchase order financing, and merchant cash advances.
Most alternative lending programs have a relatively high cost of borrowing, so they are typically best used for short-term financing.
Credit for Established Businesses
Once a business has established a solid credit rating, they are likely to qualify for the classic business financing options such as bank loans, lines of business credit, and business credit cards. How should these sources of capital be used?
Bank loans are ideal for financing high-cost items that must be financed over extended periods of time. While business loans do require an often extensive application process, the cost of borrowing is lower than credit cards or lines of credit.
Business credit cards, on the other hand, are a convenient source of immediate capital. There’s only one application process for them, and once it has been completed, the money can be borrowed as many times as necessary. In addition, they allow easy business expense tracking, and may provide money-saving perks.
While they are convenient, business credit cards can be a costly source of financing. Their interest rates are typically much higher than those offered on business loans, not to mention the fact that they often have the sort of hidden clauses and fees outlawed on consumer credit cards by the CARD Act. Bottom line: do use business credit cards, but use them wisely, and know what you are getting yourself (and your business) into.
Lines of business credit are best used for purchases that are too large to be affordably financed on credit cards, but too small to warrant taking out a business loan. They are generally more affordable than credit cards, and always more convenient than applying for business loans. Like credit cards, business credit lines are revolving accounts, so they are very flexible.
Increase Your Options With Business Credit
As you can see, the many different types of business credit all have their pros and cons. There are things that each is very useful for, and other things for which they are less than ideal. But, when running a business, it pays to have as many options as possible. How do you open up your business financing options? By building a good business credit rating, of course.
If you are a small-business owner interested in getting a head-start on building your business’s credit rating, look into Small Business StarterTM from Dun & Bradstreet, which allows businesses to start documenting their business credit in just five days.