Establishing business credit is important if you wish to secure financing for your business without using your own personal credit. You can start building business credit with types of business credit such as business credit cards, lines of credit, and business loans. Each type of credit has its own benefits and drawbacks, so it’s important to educate yourself before choosing the credit that best suits your company.
Business Credit Cards
Business credit cards can be a convenient way to establish a positive credit rating. Spend time researching which card has the most appropriate terms for your business, including perks, like airline points. The bottom line is that you must pay close attention to the stipulations of the card. Many cards contain hidden annual fees, or begin with an APR teaser rate that increases after a certain time. You will also incur fees and a higher APR if you fail to pay the minimum payment or if you make your payment late.
Business Lines of Credit
If you need to obtain a large sum of cash quickly, then a business line of credit may be the best solution. Business lines of credit typically offer higher credit limits and lower interest rates than credit cards – but if your business is less than two years old, you may not be able to secure a business line of credit without using a personal guarantee and personal collateral (which puts your personal assets at risk).
Loans can be used for financing capital projects, such as building improvements, and equipment purchases. You must show the bank why your business deserves a loan, so be prepared with business plans and budgetary projections. Business loans are not a solution for everyday expenses; you do not want to have to prepare a presentation every time you need money. Generally, a company would apply for this type of business credit after first securing a business line of credit.