If you are a small business owner, you’re bound to experience cash flow problems at one time or another. Whether it is paying employees, purchasing inventory or repairing broken equipment, you are going to need some extra cash that you may not have yet. That is why it is important to establish a business line of credit.
What is a business line of credit?A business line of credit is not a loan. It is structured like a credit card which does not rely on your personal credit information, but rather that of your business itself. Credit of this type helps small businesses get started, and it helps them grow. So even if your personal credit is poor, it still may be possible to get a line of credit through your business instead.
When you take out a line of credit, you use the money for business related expenses such as payroll, utilities, equipment and so on. Like a credit card, your limit will stay the same and you can use and pay off what you need each month. As you make monthly payments to your creditor on time, you may be allowed to borrow more as you pay down your debt. The amount of your payments is figured by the amount of credit you’ve used over the previous month.
How to establish business credit?
There are many ways to establish business credit, just like personal credit. Here are 5 tips to help you build solid business credit:
On-time payments: Most importantly, you want to pay your bills on time. It is also important that bills such as your telephone, your internet and your utilities are in your business’s name, not your own name. This will ensure that they are considered separate from your personal credit.
Research: Check out multiple lenders before making a choice. Find out what their terms and interest rates are. There are lenders who will even give a line of credit to businesses with low or bad credit scores, but the interest will likely be very high. You may have to go with a secured line of credit until you prove yourself to creditors. That is where you put a certain amount of money in and are allowed to borrow against it. When you make on time payments your credit score improves.
Credit cards: If you have business credit cards, keep the balance low and make your payments on time. Maxing out your credit cards is a red flag to lenders who may worry about your ability to make payments on time.
Baby steps: You may need to start with a small line of credit even if you really need more. Take what you can get and make timely payments to increase your credit rating.
Apply right away: Don’t wait until you are in a hole to act. Take out a line of credit right away and make small purchases on it. Pay off the entire amount monthly. This will increase your rating and come in handy when something happens and you need a larger line of credit.
The most important thing to remember is that you don’t want to over-extend yourself. Take out only as much as you need and can afford. Do your homework and your business will be up and running in no time at all!
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