The Gallant Group

The Basics of Business Credit

What is business credit? How can my business build credit? Those two questions are among the most popular ones I get asked regularly from aspiring or even thriving entrepreneurs.

For a more detailed version of this article, check out my new ebook on the matter http://www.thecreditmonster.com

The business credit card and credit line industry are so vague and hidden from the general public that unbiased information on the subject is hard to come by. Most entrepreneurs learn to get credit through establishing good relationships with their vendors and enlarging their NET 30 payables to vendor financed credit lines. Though this is a straight forward approach, such relationships with vendors take lots of time and trust to build. Plus the volume being transacted must be sufficient to justify such a credit line.

There are easier ways. In my article “Creating Business Credit” I explore the first few steps that an entrepreneur must take to establish new trade lines with large companies such as Staples, Dell, IBM, HP, etc. But in order to successfully navigate the oft confusing landscape of creating and maintaining business credit, let’s first explore the components of business credit and how it sets itself apart from personal credit.

There are a few different ways a business can get credit. The following are the most common areas of credit for businesses:

Vendor credit

This is the type of credit that a vendor grants its customers. Quite commonly, a vendor will grant credit lines to a client and give revolving payback terms so that the client has the opportunity to buy in bulk and pay over time. Vendors often charge an inordinate amount of interest on this type of credit. It is quite common for young companies to be charged 20% interest on balances due if the entirety of the balance isn’t paid upon receipt.

Credit Lines

Credit lines are bank or private entity authorized lines of credit that work similarly to a business credit card account. The advantage is that a business is given the freedom of writing checks out of the credit line if it chooses to. For example, a bank may give a company $50K worth of an unsecured credit line that is tied to a checking account. A company can cut checks out of its line of credit account to meet payroll obligations, finance short term debt, etc.

There are two kinds of credit lines: 1) unsecured and 2) secured

Unsecured Credit or Unsecured Lines of Credit

This is the most common type of credit line and in most cases the easier credit line to get. Quite literal in its definition, an unsecured credit line is simply a line that does not encumber any asset of the owner or the business. In other words no lien or security instrument (UCC filing in business terms) is used to secure the credit line and hence a legal entity (corporation, partnership or LLC) has complete freedom to take out as many credit lines it needs (depending on the amount). Different banks have different limits at which they’ll grant credit without a UCC filing against the company. Some go only as high as $50K, while others go as high as $100K. Typically, any credit line beyond $100K carries a UCC filing and will show up as a lien against the business if a credit report is pulled. Despite the ease at which these are granted, the owner does have to sign a personal guarantee. In other words, if the business defaults on the line and is unable to payback the loan, the bank reserves the right to come after the business and personal assets of the owner to reclaim its debt plus interest lost.

Most unsecured credit lines require excellent credit scores (680+) with no history of bankruptcy, default or foreclosure. They are seldom given out to those with no assets (non-homeowners, no stocks, bonds, IRAs, mutual funds, etc) or to companies that have been around for less than 1 year. Contact us if you’d like to apply for an unsecured credit line. Typically we can open an unsecured credit line for you nationwide in 48 hours for a $500 flat cost.

Secured Lines of Credit

These exist in various forms but as the title goes, they are all secured against some business or personal asset. Secured lines are used most often when a business is asking for large ($100K+) lines of credit. They can be commonly secured against assets, equipment, receivables, or inventory of the business and the business must show at least 1 year of profitability with demonstrated ability to make interest only payments on the secured lines of credit while maintaining profitability.

Credit Cards

Perhaps the most notoriously misadvertised in the group, business credit cards that are given purely on the business credit itself are tough to get. There are many companies that will check personal credit scores and use them as the default factor on which to grant a business credit card. A good rule of thumb is that if a company is looking for a business credit card and the owner can’t get a personal credit card, the company won’t be able to get credit either since the decision will be based on the owner’s credit. Don’t fall into the trap of submitting your credit application 10 or 20 times to different credit card companies promising business credit.

Leases

Leases can be in a variety of forms though two most common ones are those for equipment and office. Leases are for a set term and can be granted from a variety of different sources. Depending on the structure of the lease it may or may not show up on a business credit report.

This entry was posted on Sunday, April 8th, 2007 at 5:00 pm and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.