Every small business owner knows having adequate finance is essential for the company to grow, thrive, and survive during tough and competitive times. And using the right type of credit can help your company’s finance management along the way.
However, there are multiple options in the market, all offering similar functionalities. So, choosing a business credit for a start-up can sometimes be too overwhelming. The basics to look for are:
- A credit that provides good finance management
- A card that offers access to your Equifax credit report
- A business account that has endless bonuses for using the credit
- A credit that can give a financial boost to your small business
Of course, these are only a few. But, when you’re a start-up, anything and everything sounds too good to be true. So, how can you choose the credit for your start-up that can pay off everything you’ve done for your business? Find answers in this one guide!
What Is A Business Credit Card?
Before we discuss the basic analogy of a business credit card, let’s be clear on one thing: It’s not the same as your personal credit card! So, no, it’s not clever to use your personal card for business transactions.
- In some aspects, a business credit card is comparable to a business line of credit as it is a ‘revolving credit line’ that a business owner can use, repay, and reuse.
- According to Alexandra Twin, businesses of all sizes (small-scale or large-scale) can apply for business credit cards, which can help them create a business credit profile to improve their borrowing rates and terms.
Moreover, business credit cards typically offer a variety of special incentives to encourage business clients. These advantages may differ from those provided to individual credit cardholders.
Business Credit - Types
Every company, regardless of size, will need to apply for a business credit account at some point. The only exceptions are when the proprietor has sufficient funds to run the firm until it becomes independent or when an investor purchases an interest in the company, eliminating the need for loans or other forms of credit for start-up or future running operations.
- Business credit cards are good for financial management as they can help you track your professional spending and itemize your costs (Expense tools by CNBC).
- In addition to providing the standard advantages, business cards assist start-up owners in keeping work-related and personal expenditures separate.
But, you have to be astute while choosing the business account as your company’s finance management entirely depends on it! So, here are some types of business credits:
1. Business Charge Card
A charge card is identical to a credit card, with the exception that you cannot make monthly minimum payments. They also don’t have a predetermined credit limit. Instead, there are a few approval criteria to determine whether a charge is granted or denied. Additionally, it enables you to make purchases without deducting funds from your company’s bank account. Moreover, the business credit is approved and granted based on the following:
- Business credit score
- Current financial status
- Previous spending habits
- Account history and record
In fact, business charge cards are ideal for purchases that must be made right away but can be paid off fast because the entire sum is due in the next billing cycle. In addition, it’s worth noting that some company credit cards have 60-day payment terms. As a result, charge cards are not ideal for businesses with long-term cash flow. They are, nevertheless, still a viable choice for start-ups or small companies with a short-term cash flow. Here’s what you need to know:
- Bad Penalties: If your business doesn’t have a study repayment history, this might not be a good option for you as business charge cards have harsh late payment penalties.
- Good Credit Requirement: They are more difficult to qualify for than conventional business credit cards (due to no predetermined spending limits). To qualify for a business charge card, you’ll typically need a credit score of at least 670.
- Annual fees: Like any other business credit card, a business charge card also comes with an annual fee, which can be costly for some start-ups (with zero funding and credit history).
That said, if you want a card that will minimize your company’s overhead, zero annual fee options for business credit are worth considering.
No annual fee business credit cards provide the flexibility of credit access without incurring yearly charges. These cards help lower the total cost of utilizing credit while still providing beneficial features like rewards, lower interest rates, and cash-back rebates on all purchases.
- No Interest Fee: Truic explains in their comparison guide that business charge cards have no interest as you have to pay the amount in full every month.
The fact that a charge card does not have a spending limit, as a credit card does, is perhaps the most enticing feature for start-ups who need to spend a lot at the start. They can buy urgent materials or supplies using a business charge card without applying for a business loan or even borrowing from others.
2. Revolving Credit
In the business world, a business line of credit is a common sort of borrowing. In addition, a revolving line of credit, aka RLC, is a kind of loan that permits the account owner to borrow money at the time of purchasing. The good thing is you only have to pay interest on what you owe. You can then borrow that money again if you repay any of the borrowed cash before the conclusion of the draw term. So, this revolving money cycle is what gives a revolving credit line its name. There are also credit cards that can give longest interest free period cards.
- Banks, SBA (small business administration), or different lenders can issue these types of revolving business credits.
- You can pull a specific amount for your business and only pay interest on what you borrow.
- If you need funding for expansion or want a way to meet expenses and sustain cash flow, revolving lines of credit can be the ultimate choice for your start-up business.
- According to Caroline Lupini, small businesses can draw on and return the account balance repeatedly using a revolving line of credit.
The duration of a line of credit’s draw term varies by lender. However, it typically lasts one to two years. The lender may elect to renew your loan at that point, prolonging the draw term. One thing to note is that some online lenders may take a few days to send payments to your bank account, but others deliver funds as quickly as the day the loan forms are signed. Here’s why you should consider this credit type for your business:
- Flexible interest terms: You don’t have to pay any interest fee on the credit unless you pull the funds for your borrowed credit line. You only need to pay the interest on the money you borrowed.
- Availability of funds: You can reuse the funds once you have paid the previously borrowed line in full. It’s sort of a repeated cycle for the owner where he borrows, pays, and reborrows funds.
- Easy approval: Getting approved for a revolving business credit line is easy compared to other credit types. Of course, the final terms depend on the lender or funds provider but still, it’s not a difficult process!
- Low rates: Cash advances and payday loans have higher interest rates than revolving credit. However, you can get significantly lower rates on a revolving credit. In addition, most borrowers with good credit pay between 2%-10%.
However, some good lenders might still require an above-average credit score to grant access to funds. You can use the revolving credit to renovate your office, buy supplies, or pay your company phone bill. Revolving business credit is handy for both continuing and one-time purchases. Revolving credit, when utilized wisely, may help you manage cash flow and create a solid credit score, both of which are important for maintaining healthy business finances. Hence, it can be considered good backing to create a financial plan.
3. Secured Line
As the name suggests, it’s a type of secured credit that is backed by a deposit. Before being approved, a business owner must put money into the business account, which can only be accessible while the account is open and secure. Then, a credit limit equal to the deposit amount is granted to cardholders. Working of a secured line is simple as the owner puts the deposit and starts using the card. The security fund is used only if the payments aren’t cleared after one or two months.
- Most banks and credit card companies do not issue secured business cards without a fixed security deposit, so finding the best and most affordable may be challenging.
- In addition, most banks don’t publish secured business cards online, so you’ll have to contact them to find out if they provide one.
A secured business credit card is designed for business owners who are unable to obtain an unsecured card due to their bad credit score range (low, poor, or zero credit). After a year or so of on-time payments, your card company might accept your request to increase your spending limit. The lender might also update your secured credit to an unsecured card. However, this will be determined by your payment record, credit score range, and ability to borrow money responsibly.
How does it work?
- It’s a type of revolving business line of credit where you can secure funding using collateral as security.
- A secured business line of credit works similarly to a credit card as you only pay when you take money from the account.
- In addition, the money, or a portion of it (that you borrowed), becomes a credit limit for your account.
- It also serves as a type of collateral for the card issuer because, as a cardholder, you have yet to demonstrate your ability to repay debt.
- Moreover, if you fail to manage the account, the company can then utilize the deposit you made to cover the debt.
Another possibility is that your limit may be less than what you originally deposited. However, you may still be able to boost your credit limit by adding to your initial deposit, depending on the type of your business card.
Pro-Tip: Before you apply for a secured business credit card, find out if the card provider will report your business activity to a credit agency (Equifax, Dun & Bradstreet, Experian, etc.) to help establish your company a good business credit score.
4. Unsecured Line
An unsecured credit line works more like a typical business account with the fact that the cardholder doesn’t need to put an asset as collateral. Many business owners prefer to obtain funding without putting their property on the line. In addition, some organizations, particularly startups, usually don’t have any asset that a lender or loan provider considers worth taking. So, If you fall into one of these categories, an unsecured business credit might be a better fit for you.
- The good thing is you can borrow as much as your limit as long as you can manage your finances and make the repayments on time every month!
- Most start-ups might prefer this type of business credit as there’s no risk of losing the business assets.
- However, the lender can also have the same mindset. Any security doesn’t back up an unsecured credit card, so the lender will find it hard to trust a new company!
Furthermore, due to the lender’s risk (understanding the unsecured nature of this credit type), individuals who qualify for an unsecured business credit would generally receive higher interest rates, restricted credit limit/spending, and shorter-term credit repayment terms.
If you own a small business, there’s a good possibility you’ll require more business funding than you currently have. For example, maybe your customers aren’t paying on time, or you’d like to expand your company. Or perhaps you simply want to stock up ahead of a seasonal surge. Whatever the case may be, a few different sorts of business credit can assist you in managing your business funds.
Business credits are similar to business loans but with a flexible twist. These financial credit tools, aka business credit lines, work similarly to typical credit cards. We have mentioned some of the types in this guide, so give it a read and find which will work for your business!