Business Credit

November 11, 2021 | Merchants | Dustin

Business credit gives companies the ability to borrow money for investments that will help them grow. This type of credit line is based on the businesses ability to make payments in the future. It takes into consideration their current revenue, assets, or may even include the owner’s personal credit history. 

Having good business credit allows you to easily pivot to new opportunities or get small business lines of credit or loans. Use these loans for equipment purchases, new hiring, or other expansion-oriented goals. Especially now, businesses are seeking out small business loans in order to keep running through difficult times. 


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Build Business Credit

Establish Business Credit

Your business credit profile works in much the same way your personal credit profile does.

When you’re applying under your business name, the owner has to apply under their name. In this case, you’re relying on the owner’s credit profile as a person to substantiate the business credit. It’s like having a cosigner for a loan. If you don’t have a profile, you may need a separate cosigner.

In order to establish business credit, you’ll want to start using a business credit card and making transactions. To do this, first you’ll need an EIN number or Tax ID. The IRS gives each an EIN or  employer identification number when they register their business. The EIN is nine digits; it’s like a social security number, but for a business. 

EIN and Tax ID NumberEIN and Tax ID Number

The term EIN is used interchangeably with Tax ID number. There is one uncommon technical difference however. An EIN is for federal taxes while a Tax ID can be used for federal or state taxes. Most likely, you’ll only be assigned one number and you can use it for both purposes when filing your taxes. 

How to Build Business Credit

For any new business, when you have your own Tax ID,  you can start building credit. You do this by making purchases through your business credit card and showing a steady history of transactions that you’re making payments on. Moreover, you’ll want to have a steady revenue stream to hedge the bank’s risk when it’s time to apply for a loan.

Any loan or credit line that your business is asking for will take into consideration your credit history. The bank determines your credit based on how well you’ve established your payment history and revenue stream over time.


Business Line of CreditBusiness Line of Credit

With a line of credit, get overdraft protection tied to your checking account. It will show up on your personal credit and also show up on your business tax ID. 

A line of credit is most akin to a credit card. Let’s say you start with a $10,000 credit line. The bank will give you a line of credit with the amount you’re approved for and you’ll be able to make purchases up to that limit. 

The best part of a credit line is you won’t owe anything until you draw on it. You only owe what you pay, and you can make the minimum payment each month. 

It’s beneficial for a business because you can pay as they go and draw when they need it. It gives you float with business expenses. For example, If you haven’t gotten paid on a job just yet, you can tap into the line of credit to pay off expenses and keep business running as normal.

Reasons Why Lines Of Credit Are Useful

  • Float Money – Keep your business running while waiting on revenue to come in.
  • New Equipment – Upgrade existing equipment or buy new technologies.
  • Software Investments – Purchase new software to speed up operations or increase leads.
  • Employees – Hire new employees to increase sales or productivity. 
  • Emergency Funds – Have emergency funds for unpredictable events. Such as repairing equipment. This is especially useful in the construction industry. 

Merchant Loan 

A merchant loan is a lump sum that you pay off later on. If you get an approved loan of $10,000, the bank writes you a check which you can use as you see fit, either immediately or over time.

For a merchant loan, there are fixed fees associated with receiving this large sum of money. Typical loan fees include application fees and other transactional costs which is different from bank to bank. Additionally, there could be something that’s state dependent. 

When you receive a merchant loan, you’ll have a payback term. This can be five, seven, ten, or any number of months as determined by your contract. You make regular payments on it until the loan closes out.

SBA LoansSBA Loans

Small Business Administration loans for example, are government issued loans designed to help businesses of all sizes continue operating through the pandemic and beyond. SBA stands for –  U.S. Small Business Administration, which is a branch of the government intended to assist in the development, expansion, and sustainability of USA businesses. 

The Administration grants SBA loans based on certain key conditions. 

  • You need to operate in the United States
  • Be a for-profit business
  • Work in an approved industry
  • Show a need for funds
  • Tried other measures to secure financing 

The most common type of relief they offer is to those affected by the Covid-19 pandemic. They write, “This federal small business loan program supports small businesses’ recovery from the COVID-19 disaster’s economic impacts by providing accessible and borrower-friendly capital.” If you require extra assistance to keep your business moving ahead, be sure to check out an SBA as an option. 

 

November 11, 2021 | Merchants | Dustin