Business credit is the largest source of lending, throughout the world. It basically consists of businesses loaning money to other businesses for the sole purpose of purchasing products or services. Many small companies overlook this source of financing, because they like to buy with cash from their personal resources. This is one critical reason for small business failure, within the first two years of operation. Most business owners finance their start-up with personal credit cards, tapping into a home equity line, personal loans from banks, personal loans from family members and friends, or private investors.
A common risk new businesses implicate is using personal assets as collateral for business loans and financing. If the owner defaults on a loan, valuable items, such as cars, houses, or bank accounts can be vulnerable. Rather than jeopardizing personal credit and assets for financing, a business credit rating will secure financing with more favorable terms and lower interest rates.
Business credit is needed to avoid carrying cash. In its simplest form, it should be used to conduct all monetary transactions. Without credit, businesses hamper their cash flow and create unnecessary inconveniences.
In retrospect, the Federal Reserve Board believes financing is a critical and perennial concern for the owners of small businesses. Indeed, very few things are as crucial to the health of small businesses operations. Many small businesses are launched by the personal resources of their owners. Unfortunately, they often reach the stage where they must look to the credit market for financial help in expanding operations.
The banking industry is an important source of working capital; however, entrepreneurs fail to realize that applying for commercial credit is a more customized process than obtaining consumer credit. It also requires a great deal of preparation by the business applicant. Fortunately, our coaching programs have everything covered and will prepare owners for a successful journey. Building business credit is not easy to do alone. The steps we’ve develop will successfully help accomplish these goals.
The most overlooked aspect of asset protection is separation of business credit from personal credit. Taking that first step to protect your personal assets, by setting up an entity, will only create 50% protection. It is a step in the right direction, but only the first one. The second element, eliminating the risk of co-mingling assets, by separating personal and business credit, is also very important. An individual signer is liable if the business cannot make the payments, and also if a personal guarantee is made on leases for office space, vehicles, equipment, and etc. These will burn down effective buying power on a personal level and negatively affect personal credit. Signing a personal guarantee will not increase the business credit score with the credit bureaus.
Establishing good credit is the key to success. Throughout the life of a company, the need for credit will most likely arise. Because of this, establishing credit should be started before the company actually needs it. Lending institutions will not lend money to a business in need of cash flow. New businesses can use the owner’s or officer’s credit to gain approvals, under the business name. However, they should eventually establish their own credit history and credit profile, in order to develop business credit. Sign up for our weekly Newsletter for more tips and opportunities to earn income.