No matter the size, every small business needs to apply for small business credit at one time or another. The exceptions are when the owner has the capital to run the small business until it is self-sustained or if an investor buys a stake in the company, eliminating the need to take out loans or other credit lines for start-up or operations.
When applying for small business credit, you need to ensure you are separating your private finances from the small business’s finances. It is expected that you will use some of your savings in the small business, but you should still treat that investment as though you were an outside investor. If you keep your private funds and small business funds mixed, it can lead to confusion and liability issues. Once you have separated your private finances from your small business finances, you can apply for or use different small business credit types to finance your small business. Here are four common types of small business credit and how they work.
Charge Cards
A charge card is comparable to a credit card; however, the main distinction is that you cannot make minimum payments each month. They also have no pre-set spending limit. Each charge is accepted or disapproved based on a few factors. Your small business credit score, current financials, recent spending patterns, and account history will decide if your purchase will be approved. Charge cards are excellent for purchases you need immediately but can pay off immediately since the entire balance is due the following billing cycle.
Installment Accounts
Installment accounts, also known as commercial repayment accounts, are an all-fixed amount process. The amounts don’t vary according to interest or other sliding factors. The lender will agree to loan you a fixed amount, you will concur on the final fixed amount you will pay back, then decide a fixed amount you will pay each month to pay it back. In some cases, the loaned amount is the same as the payoff amount, for instance, if you borrow from a friend or family member who doesn’t want interest. The advantage is all parties interested are clear on the amounts.
Revolving Credit Accounts
Revolving credit is money you borrow that has a pre-set credit threshold, and you can charge all you want up to your credit limit as many times as you need. The two types of rotating credit are small business credit cards and a small business line of credit. Both will have a pre-set limit. You charge or borrow any amount under the limit. Then you pay it back with interest. As long as you pay down the balance and keep your account in good standing, you can charge up to your limit an unlimited number of times. The advantage of a revolving credit savings account is that you don’t have to pay the balance all at once; however, keep in mind they will have interest connected, so make full payments when possible.
Vendor Accounts
Vendor accounts are when a small business receives products or services and pays the vendor over a set period. Most vendor accounts will expect the net amount back within 30 days; this is also known as a net-30 account. Other vendors may have longer or smaller accounts. Some will also negotiate with a small business that is loyal and in good standing. Most of these vendor accounts do not carry interest. The vendor account is exceptional for products and services and for building vendor trust and relationships. Another plus to a vendor account is that it is reported to business credit bureaus and can build your financial status as a small business.
Conclusion
When you have a small business, it is best not to use your money to fund the small business unless you treat it as an investment and pay yourself as a stakeholder from profits. Using small business credit is a reliable way to take care of small business needs until it is self-sustained. You should cautiously ponder all the options and use what makes sense for you and your business. You can use more than one type of small business credit; be sure you keep in good standing, or your small business could suffer financially.
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