09 Aug

3 Things to Consider Before Establishing Credit for Your Business

How do you establish business credit for the first time?

Building good business credit creates an asset that you can use to acquire financing for your business based on its own creditworthiness instead of yours. This article examines the three main things that you should look at when establishing business credit and also how your personal credit affects the credit worthiness of your business.

Wikipedia defines an asset as a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. (Source: https://en.wikipedia.org/wiki/Asset). Simply stated, it’s a value of ownership that’s convertible to cash.

You don’t hear much about business credit being an asset, but it is. It has value to your company’s financing ability and credit capacity. Think of it as you might other intangible assets such as patents, copyrights and account receivables.

Building good business credit creates an asset that you can use to acquire financing for your business based on its own creditworthiness instead of yours.

Why use business credit rather than your personal credit?

– Businesses have larger credit capacity (10-100 times) than individuals.
– It increases the company’s value since it’s a fully transferable asset.
– It protects personal credit and eliminates co-mingling of company and personal assets.

So what should you consider before establishing credit for your business? Well, there are three main things that you need to look at:

  1. The ability of your business to use credit. You need to consider whether your business can afford to use the credit, as every business has unique credit needs. Many small business owners assume that since their business has been granted credit, they can afford to use it. This should be carefully considered as credit comes at a cost.
  2. Spending patterns. The second thing you need to address is how you plan to use the company’s credit. If you plan on paying the invoices every month, then the interest rate is not a crucial factor. Look for credit with no annual fees and longer grace periods.If you’ll carry a balance month to month, look for the lowest rate possible. If your credit is for day to day use, look for a low rate with a sizable credit limit. Whichever credit type you use, make sure your payment experiences are reported to your company’s credit files.
  3. Interest rate and terms. Ensure that you pay close attention to these as a lot of credit card issuers offer a low introductory rate which will adjust higher after the introductory period expires.

Read about why building business credit is so important

References:

https://www.sba.gov/blogs/3-main-points-you-establish-credit-your-business

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3 Things to Consider Before Establishing Credit for Your Business

About the Author

Alan Johnston
Alan heads up the Information bureau side of the business (CRISworks) as well as providing credit expertise and consultancy to clients in the areas of Credit Management best practices, credit training, Credit Terms of Trade reviews, PPSR education, and pretty much all other credit requirements of clients in need.

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