The power and potential of business credit
Understanding how to establish and access credit is essential to the success of your business.
You’ve invested a lot in your business — not just money but hard work, inspiration, intention and time. There’s nothing more rewarding than planting a seed and watching it grow. To flourish, your business needs opportunity and access to resources that can help it reach its full potential, and credit is the key.
With access to credit, your business has the financial power to keep day-to-day operations running smoothly and unlock opportunity for growth.
What is credit?
Credit is usually an agreement with a lender or another type of creditor that allows you to access goods or services with the promise of paying later, usually with interest.
Credit is also your reputation as a borrower. If you are reliable in repaying your debt, then your creditworthiness is considered good. If you miss payments, lenders may see you as a risk, impacting how much money creditors are willing to lend you and the interest you’ll have to repay.
Types of credit and when to use them
Three main types of credit are available to businesses: credit cards, business lines of credit and term loans. Each serves different needs and unlocks different opportunities.
- Credit cards
When you think about credit, credit cards are probably the first thing to come to mind. They’re easy to apply for and relatively simple to understand, so a credit card is a good place to start establishing your borrower reputation.
Credit cards allow you to make purchases on credit up to a specific limit and then repay the debt in monthly installments. This flexible and dynamic approach to credit is called revolving credit. Credit cards are subject to finance charges and interest fees, which you can avoid by paying the balance in full each month.
Besides the increased purchasing power and convenience of paying for purchases with a card, many credit cards also offer rewards such as cash back or airline miles.
- Business lines of credit
A business line of credit is another type of revolving credit that allows you to borrow up to a certain limit and pay interest only on the amount you withdraw. You make payments on the funds and then continue to draw on the line as needed.
Lines of credit tend to have higher credit limits than credit cards but also higher interest rates. You may need to secure them by putting up collateral, such as real estate or some of your business assets, that the bank can recoup if you fail to make repayments.
The big advantage of a line of credit over a credit card is that it gives you access to cash. Cash that may be the key to unlocking that big opportunity, like buying inventory at a large discount, covering payroll while you wait on a new client account to materialize or acting on some other strategic chance you envision.
- Term loans
Unlike revolving credit, term loans involve borrowing a lump sum and then repaying the principal over time, usually with interest.
Many term loans charge a fixed interest rate, and payments are scheduled over the term of the loan (this is called an amortization schedule). Unlike a line of credit, which can be tapped into multiple times throughout a year, term loan funds come all at once. The interest rate is typically lower than on a line of credit but applies to the whole sum.
Term loans can be the key to making those large purchases. For example, you might take out a term loan to buy a new piece of equipment that could take your business to the next level, renovate a space to improve the customer experience or fund the expansion of your operation.
Credit and credit scores
Lenders grant credit based on their confidence that you can be trusted to pay back what you borrow. Remember, your credit score is part of that credit reputation you’re building.
One important way lenders gauge the creditworthiness of your business is by reviewing a business credit score provided by one of the three primary credit reporting agencies: Dun & Bradstreet, Experian and Equifax. Your business credit score is different from your personal credit score. If your business is very small or hasn’t built a significant credit history, lenders may also take your personal credit score into account.
Reporting agencies consider several factors when calculating your business credit score, which can range from 0 to 100.
- Payment history: Have you consistently made payments on time?
- Debt and debt usage: How much do you currently owe? Are you using credit at unsustainable levels?
- Length of history: How long have you had established credit?
- Industry risk: Are you operating in a new or volatile industry?
- Company size: Is your business big enough to withstand adversity?
A good credit report and score are vital to getting the capital you need to run and grow your business. With a better score, you can access more lenders, a more favorable interest rate and more opportunities.
Giving your business an edge
Nearly 75% of small business funds come from bank loans and business credit. These crucial funds make it possible for you to avoid speed bumps and grow your venture with capital that matches your needs. Without it, you’re limited to running your business with what’s in your pocket.
Credit can be used to cover day-to-day expenses — such as purchasing inventory, hiring additional staff and paying vendors — while conserving cash on hand.
What sets businesses apart is that some can expand and others are limited. Being able to access credit when you need it can be a lifeline for your business and a vital tool when it comes time to grow.
To learn more about how credit can make a difference for your business, talk with a Chase banker in your area.