I often get this question from my coaching clients who are starting a new business. Usually they are referring to revolving versus non-revolving debt. Revolving debt is the kind of debt that is associated with lines of credit issued to credit card holders. Non-revolving debt is associated with mortgages, vehicle and student loans, and other debt that involves fixed payment schedules.
I believe in entrepreneurship because I believe that this is one of the best ways to achieve financial independence and freedom. However, one of the first steps you should take toward financial freedom is to eliminate or decrease interest-bearing revolving debt. And if at all possible eliminate or decrease non-revolving debt – though this may be unrealistic for the average entrepreneur.
Reducing Revolving Debt
Your goal should be to eliminate revolving debt that you carry from month-by-month. This type of debt generates interest and fees that add more debt to your debt. It’s okay to maintain revolving debt as long as you pay it off in full by the due date each month. It is also best to maintain a 30% or lower credit utilization rate. In which case you don’t incur any interest and you are able to build your credit more efficiently.
However, anything beyond this will be a financial burden on you as you try to build your business. This is why I absolutely recommend starting a business free of revolving debt. You should also maintain a manageable amount of non-revolving debt. Doing so will take a great deal of stress off of you as start your new business venture. This way you can concentrate on building your business without the pressure to perform just to pay off debt.
Obtaining START-UP CAPITAL
I recommend establishing business credit from the start of your business venture. However, I also recommend limiting the amount of money borrowed for business start-up. If you need to borrow money for your business be sure that you can pay off your debt in a timely manner. Only borrow what you can comfortably pay back each month and be strategic when making business purchases.
This is my general advice before starting any new venture that involves finances. Whether you are buying a new house or vehicle, or tying the knot, it is best to start with as clean a slate as possible. This way when unexpected expenses related to your new purchase or venture arise you won’t be caught completely off guard. So if at all possible, you should clear all interest-bearing revolving debt and as much non-revolving debt before starting your business.
One of the first things that prospective entrepreneurs must consider when starting a new business is funding. Without the right amount of start-up capital, growing your business can be much more complicated and cumbersome than necessary.
There are many effective ways to secure the right amount of money to start your business. Here are a few ways in which entrepreneurs can get the funding that they need for their business endeavors.
Savings and Investments
Savings is probably one of the most common ways that new business owners finance their start-ups. This is one of the simplest ways that the average business owner can accumulate venture capital. It doesn’t require approval from a third party and the ability to save is completely within the entrepreneur’s control. It may take longer to save enough cash to start your business but the benefit is that you will not owe or be obligated to anyone in the long run.
If you decide to save for your start-up, it is best to place your money in a high yield savings account. These types of accounts can offer annual yield rates (AYR) of up to 2% compared to the average 0.09% AYR offered by regular savings accounts. This means that you could potentially grow your money up to 9 times faster in a high yield savings account.
Investing in the stock market is another viable, loan-free way of accruing venture capital. Gains from dividends can add up a lot quicker than savings, yet this method is also riskier than stashing money in a savings account. Though, there are less riskier investment options like certificates of deposit, bonds, and bond funds – these methods yield low and slow returns.
On the other hand riskier options like individual stocks, exchange-traded funds (ETF’s), and index funds can yield higher and quicker returns. However, with these options there is a higher likelihood of losing some or all of your investment. But if you invest wisely the gains usually outweigh the losses.
Grants are great ways to fund your business. Government and private organizations, agencies, and institutes offer a number of grant opportunities on an ongoing basis throughout the year. Most grants have specific eligibility criteria and defined deadlines for submission. However, if you meet the qualifications and deadline requirements you can possibly secure a grant to finance part or all of your start-up costs and future expenses.
The major benefit in receiving grant money is that it is free. There is no requirement to pay back grant funds. Another benefit about receiving certain grants is that they can enhance your company’s reputation and credibility and increase your visibility. Additionally, individuals in certain minority groups or protected classes such as women, and Native, Hispanic, and Black Americans, and veterans can qualify for specific grant opportunities geared toward underrepresented groups in the entrepreneur space.
Some of the disadvantages about applying for grants is that the process can be long and tedious. Usually grant applications require surmountable time and effort that can be prohibitive to new entrepreneurs who are focused on their business operations. In addition to this element, grants are very competitive. There are often many applicants vying for the same grant opportunity which makes them a less dependable financial resource.
Also, grants tend to come with specific stipulations. Grant recipients have to spend funds according to the rules or guidelines of the grant issuer. You cannot use grant funds in any way you choose. Though there are a few disadvantages to grant funding, there are a number of inherent benefits that make grants worthwhile sources of start-up capital.
Crowdfunding is another beneficial tool for securing start-up capital. This funding option requires you to solicit prospective investors or donors to finance your business or project. There are a few common crowdfunding models available to business owners which include the following:
Investment-Based: Individuals, groups, or organizations invest in your business in return for future dividend payouts.
Loan-Based: Individuals, groups, or organizations lend you interest-bearing loans.
Donor-Based: Individuals, groups, or organizations give you money with or without the expectation of something in return.
Reward-Based: Individuals, groups, or organizations give you money in return for a finished product or defined service linked to your business.
Depending on the model you choose and your ability to secure sound investments, crowdfunding can be a very useful financial tool for your business. You can raise all or most of your venture capital and long-term buy-in from investors. This is also a great way to promote your products or services to future customers.
However, there are also a few disadvantages to this method. If you set up an investment-based model you are essentially selling part of your business. If you use the loan-based crowdfunding model you will have to pay back the money you receive and oftentimes with interest. Once you choose the reward-based model you are entering into a quid-pro-quo relationship, which puts more pressure on you to deliver. If you elect the donor-based model you may receive less funding.
Additionally, you may have to pay subscription, platform, processor, or other fees when using popular crowdfunding platforms. If you set up your own website, you may have to pay money for hosting and/or promoting your website. Additionally, your reputation is as stake when you crowdfund. You have a lot more pressure to deliver on a product or service if you choose this funding option.
One of the more common ways of start-up funding is through borrowed money. This may be in the form of a business loan, credit card, or line of credit. You can borrow money from a number of sources including family, friends, and banks and other financial institutes. Borrowed money generally requires you to repay funds on a monthly basis with interest.
The benefit of borrowing money is that it is generally a straightforward process that usually takes a matter of hours to a few days. If you have good to excellent credit it is fairly easy to get approved for credit cards. And if you have stellar credit and decent sources of collateral it is fairly easy to get a business loan or line of credit.
On the other hand, it is generally difficult for new business owners to get loans from financial institutions because they don’t have an established credit history. Also, business loans bear interest. This means that you will repay more than the amount that you borrowed. Credit cards are a little better in this regard because you only pay interest on balances that you carry from month to month. Repayment of loans, credit card, and line of credit debt usually begins within 30-60 days after you borrow the funds.
These terms and conditions can add to a new business owner’s stress level. Repaying money when you have little to no business cash flow can result in anxiety. This can subsequently adversely impact the performance of your business. You may end up cutting corners, compromising your integrity, selling yourself short, overextending yourself, etc. trying to pay back money that you don’t have.
So I always recommend borrowing money as a last resort for new business owners. This includes money borrowed from family or friends. Because even if not repaying such loans has no bearing on your credit score, this can adversely impact your personal relationships and possibly your reputation.
When it comes to business finances, choosing the right business credit card is a must. Not only is a credit card important in establishing your business credit history, it is also a viable line of credit that your business can benefit from during periods of financial instability. Likewise, business credit cards are a great resource for separating personal and business expenses.
As with any form of credit, business credit cards are only as beneficial as you make them. If you spend and pay credit card debt wisely, business credit cards can be a great resource for you now and in the future. On the other end, if you are not responsible with your spending and repayment of debt you can encounter financial trouble. So be mindful of these dynamics when considering which credit card is best for your business.
Aside from issues related to personal responsibility, I have outlined some other elements that you should consider when applying for business credit cards. This list is organized according to level of importance as certain elements should take priority over other elements when it comes to acquiring a business credit card.
Credit Card Networks
The first thing you should consider is the credit card network that corresponds to your business needs. There are four major credit card networks that offer both personal and business cards. American Express, Discover, MasterCard, and Visa are the most common credit card networks both in the U.S. and abroad.
American Express (AMEX) and Discover are both credit card networks and issuers. This means that these companies provide and offer their own credit cards to consumers without the use of a third party. However, American Express does work with some issuers such as Bank of America, USAA Bank, and Wells Fargo.
Visa and MasterCard are almost exclusively offered through third-party issuing financial institutions such as Capital One, Chase, and Citibank. Because these financial institutions issue Visa and MasterCard branded network cards they set their own terms, fees, rates, and benefits for their individual cards.
A credit card network is important because of its acceptance rate in the U.S. and abroad. Visa and MasterCard networks are accepted virtually everywhere globally. This obviously makes them a more popular choice for some business owners because of their level of flexibility.
American Express and Discover Card networks are accepted by many merchants, however, they are accepted at fewer places than Visa and MasterCard networks. Also, while the global reach of these networks is expanding it is fairly limited in the international arena in comparison to Visa and MasterCard.
On the other hand, both of these networks have amazing benefits and perks that are also attractive to business owners. In fact, American Express is my favorite network and it is the card that I use most often for personal and business finances because of it’s many other advantages.
As a business owner, you are not limited to one credit card network or issuer. You can have as many business credit cards that your company qualifies for. That being said, it may be a wise strategy to have two or more business cards from different networks and/or issuers. Having multiple credit cards can benefit your organization in a number of ways, which I will discuss later in this post.
There is no magic number of business credit cards that you should acquire. It all depends on your business needs. I personally have two business credit cards and I will possibly get a third one in the near future. Although American Express is my favorite card card, I also maintain a Visa credit card because AMEX is not accepted everywhere. I personally don’t like carrying too many credit cards so I maintain a limit of six credit cards for combined personal and business purposes.
The second major consideration is the annual fee, which can range from $0 to $550 and sometimes more. While it may not seem like it from the outset, credit cards with high annual fees are oftentimes more beneficial to have than those with no annual fees. Of course, this is all relative to your situation and your business needs.
Zero percent annual fees are usually more appealing to business owners who wish to maintain low overhead costs or for those who don’t usually take advantage of benefits and reward systems. However if your business operations include frequent travel or credit card use, some premium cards with variable annual fees may be a good option for you.
Keep in mind that annual fees must be paid regardless of credit card use. So if you don’t use your business card frequently or you are not interested in the benefits or rewards available to you it may be best to select a no or low annual fee credit card. On the other hand, if you plan to use the card on a regular basis and/or if you desire certain card rewards, mid to high range annual fee cards may be a better option.
In the same way that you can get business credit cards from multiple networks and issuers, you can also get credit cards with variable annual fee rates. You may want to consider having one or more card with no annual fee and at least one card with an annual fee so that you can take advantage of certain rewards. Aside from the benefits and rewards that annual fee-based credit cards offer, business credit card annual fees are also tax deductible. This tax deduction does not apply to personal credit cards used for business-related purchases.
Annual Percentage Rate
The third major consideration is the annual percentage rate (APR) more commonly referred to as the interest rate. This is the amount that you pay on balances that you carry from month to month. This can range anywhere between 13.99% to 24.99% or more depending on the type of card that you have.
Business credit card rates are based on a number of factors including prime rates, business credit history, reward programs, etc. Credit history is definitely a defining factor in interest rate assignment, however, it is usually not the greatest factor when it comes to cards with reward programs.
I consider the interest rate to be secondary to the annual fee because it is completely within the control of the card holder. If you don’t carry a balance, you don’t pay interest. However, if you do carry a balance you will pay a penalty from month to month. So while the APR should be examined when applying for business credit cards, your spending habits should also be a deciding factor in regards to the APR that you accept.
The fourth thing you should think about is the card benefits. Every business credit card comes with a standard set of benefits. Such benefits are automatic and do no require the cardholder to make purchases or participate in other activities in order to redeem them. These benefits usually include fraud alerts and protection, car rental insurance, purchase protection, extended warranties, concierge services, etc.
While often overshadowed by glamorous reward programs, credit card benefits can be quite useful in many cases. They can save you from purchasing rental insurance during business trips or provide you with road side assistance. They can help you stay on top of your credit history by providing you with monthly credit score reports and instant credit activity or fraud alerts among other things.
There is so much competition among credit card networks and issuers in today’s world that it can be complicated trying to decide which credit card is right for your business needs. All major credit card issuers have established comprehensive reward systems at every tier. And this is the main way that they entice credit card consumers.
As a result, most prospective credit card applicants focus on the benefits of the card before considering the above-mentioned factors. While reward systems can certainly make the case for selecting one card over the other, it should not be your top motivating factor when selecting a business credit card. Instead, it should actually be the last motivating factor.
While sign-on reward offers can appear quite enticing it is very important to read the fine print. Some of these perks are temporary, which means that they decrease in value or altogether disappear after an introductory period.
That being said, many reward systems can be quite handy at times. In fact, some issuers have very comprehensive and advantageous reward systems that are definitely worth the cost of the annual fees. In general, the higher the annual fee the greater the benefits you reap from the reward program. Some of the most common rewards include cash back, points, and travel.
Cash back reward systems generally range anywhere from 1-5% for every dollar spent. Usually the more cash you get back, the higher the annual fee. Sometimes the annual cash back rewards that you receive simply offset the annual fee. In which cash, you don’t lose or win anything. However if you spend enough or you have a no-annual-fee cash back reward system, you may be able to pocket a decent amount of cash every year.
A number of cash back reward systems also come with some quite generous sign-on bonuses. For instance, you may have to spend $3000 within the first three months of opening your account to get $500 worth of bonus cash back. In which case a $95 annual fee is covered 4 times over.
Cash back rewards are generally the most versatile of the most common reward systems. When you get cash back you can spend it however you please. You are not locked in to using it with one vendor or on specific items. Yet, at the same time this type of reward system is very flat. It generally doesn’t come with other perks and it is solely based on how you use your business credit card.
Points-based reward systems are similar to cash in that they are usually flat-rate programs that only include points. They are also fairly versatile in terms of the rewards that are available through the program. However, it usually takes longer to receive these items because they have to be processed and mailed to you. It can take anywhere from 2-12 weeks or longer to receive items redeemed through point reward systems.
Points can be redeemed for various items inclusive of apparel, business supplies, gift cards, electronics, household items, and even travel. Sometimes point rewards can even be redeemed for cash.
Travel rewards are my personal favorite, which is why AMEX is at the top of my list. American Express has one of the best travel reward programs available right now – only Chase is conquerable to it in my opinion. Our family literally once paid for all of our travel expenses inclusive of 4 first class airplane tickets, and a 7-day hotel stay and rental car with our travel rewards offered through my AMEX card.
A number of other credit card companies also offer travel business credit cards. Travel reward benefits often include free or reduced cost airplane tickets, hotel stays, car rental fees, and more. These types of cards are for serious travelers as they reward users who pay for airline, hotel, and other types of travel with their card.
Though well worth their value, travel reward programs usually come with steeper annual fees. Most of the top tier travel reward business credit cards boast an annual fee of anywhere between $250-$595. Such programs generally include free annual airline tickets or fee credits, airport lounge access, rental car insurance, and more. This means that you can easily get double or triple the value of your annual fee depending on how you use your card and your reward program.
Chances are your child or children already help out a bit in your small business operation. They may do anything from helping to carry, count, or sort inventory to answering phones and relaying messages. These are all work-related duties that they should be getting paid for just like any other employee.
Under the provisions of the Fair Labor Standards Act parents who operate a sole proprietorship, single-owner limited liability company, or spousal partnership may legally employ their child in their business. This guideline applies as long as the child is at least 7 years of age and is able to reasonably perform business-related tasks and duties.
There are certain occupational restrictions that apply to the employment of minors, however, in most non-hazardous workplace environments children can be legally employed and compensated. Additionally, there are daily and weekly work hour restrictions depending on the child’s age and school status. So definitely check the law in your state on what kind of work your child can legally perform and how frequent your child can work.
Aside from the obvious monetary benefits that the child receives, this employment situation can be advantageous to you and your child in a number of ways.
When you employ your child in your business and give them real, transferable work skills you are helping them build their resume or entrepreneur profile. This way if there is ever a need or desire for them to work for a non-parental employer they will have bona fide work experience.
Parental employment situations can also help children learn to be socially and economically responsible. If children are allowed to manage their time and income (when appropriate) they can quickly develop life skills that will benefit them for years to come.
While individuals under the age of 20 must be paid state minimum wage rates after the first 90 days of employment, it is often cheaper to pay and sustain a child’s salary in small business operations. By law, a child must be paid fair wages for the job he or she is performing and in most cases state minimum wage rates meet this requirement for entry level jobs.
In general, you want to pay your child according to industry standards for the job he or she is performing. However, an adult with household responsibilities would usually request more in the same role. Even if the adult agreed to the same wages, his employment may be short-lived with your small business if he is able to secure better wages elsewhere. So not only are you able to save on wages, you can also save on recruitment and retention costs that often plague small and large businesses alike. This is an excellent benefit in the start-up phase of your business.
Employing your child in your family-owned businesses has its share tax perks for you and your child. First, the child’s wages are exempt from Social Security, Medicare, and Federal Unemployment (FUTA) taxes as long as the child is under the age of 18. Social Security and Medicare taxes start to kick in at the age of 18, but you are still exempt from paying FUTA taxes until the child reaches the age of 21.
Additionally, if you pay your child less than $12,400 this year her entire salary is exempt from taxes per IRS rules. This guideline only applies if the child is single or married filing separately. In which case, the average child will qualify for the standard tax deduction which usually increases every year.
Second, your tax benefits will come in the form of payroll deductions. You can deduct any and all payroll expenses on your annual tax return. This includes the salary you pay your child regardless of how the child uses it. This guideline is even applicable if you qualify for a child tax credit under your small business and/or through employment.
If you are like the average entrepreneur, you want your child to eventually follow in your footsteps. This could mean either taking over the family business or building his or her own empire. Either way the earlier you start preparing your child for business ownership, the better. Your child can develop valuable skills and abilities if they start working with your family-owned business from a young age. This way if you are unexpectedly unable to maintain your business, your child can do so lending to your family’s economic stability.
Need more beneficial business development ideas? Contact us and we will gladly assist you in your endeavors.
The Department of Treasury has made amendments to the Paycheck Protection Program created under the CARES Act. Here’s what you need to know:
As of midnight April 3, 2020 small business owners were eligible to apply for the Paycheck Protection Program (PPP) that I discussed in my last post. Starting April 10, 2020 independent contractors and sole proprietors can begin submitting applications for the PPP.
The list of approved lenders has been expanded to include:
Small business administration (SBA) lenders
Any federally insured depository institution
Participating federally insured credit unions
Participating Farm Credit System institutions
Other regulated lenders who apply for approval
The original CARES Act indicated that loan interest rates can not be more than 4%. A fixed interest rate of .5% was later established for the program. On April 2, 2020 the fixed interest rate was increased to 1% after smaller lending institutions had further discussions with the federal government. While there has been a slight increase in the fixed interest rate, it is still much lower than initially proposed upper limits of 4%. Thus, this is still a great program for small businesses who are suffering economic hardships during the COVID-19 pandemic.
We will keep you updated as more changes are implemented within the Paycheck Protection Program.
Though COVID-19 has turned our world upside down, there is still an upside to the situation. While we have experienced major shifts in how we work and many are out of work, there is relief in sight for some who may be on the verge of economic hardship. As of March 27, 2020 the federal government implemented the Coronavirus Aid, Relief, and Economic Security (CARES) Act that has been designed to provide financial assistance to individuals, families, healthcare entities, educational entities, non-profit organizations, small businesses, and the like.
In this post, I am going to focus on the parts of the act that specifically apply to the Paycheck Protection Program that was implemented to stimulate small businesses and a number of other individuals and entities that employee 500 or fewer employees at one physical location including:
These businesses and entities are eligible to receive covered loans as long as they were in operation during the covered period between February 15, 2020 and June 30, 2020. This ultimately means that the business, individual, or entity must have been in operation by February 15, 2020 and must continue to operate based on the provisions of the covered loan through June 30, 2020. Certain loans that were acquired on or after January 31, 2020 may be refinanced under the Paycheck Protection Program and receive the covered benefits.
Loans covered under this program are meant to ensure that these businesses, individuals, or entities are able to meet payroll demands throughout COVID-19 quarantine and business activity suspension periods. The loan was created to ensure that businesses are able to cover salaries, wages, commissions, and tips. It also covers vacation, maternal and paternal, family, medical, and sick leave pay and separation allowances. Additionally, employers can use the loans to cover group health benefits, insurance premiums, and retirement benefits.
Each of these payroll costs extend to all employees as long as an individual employee’s salary doesn’t exceed $100,000 annually. Also, only U.S. based employees may be compensated under the stipulations of the loan. In addition to payroll costs, the loan may also be used to cover costs related to:
Interest on debt obligations
The benefit of these covered loans is that they are readily available to small businesses. Typical small business administration (SBA) loan requirements such as personal guarantee or collateral, fees, and the inability to procure other small business loans do not apply.
A personal guarantee requires a business owner or executive to guarantee that their personal assets may be used to pay loan debt in the event that the business is unable to do so. Collateral loans require the borrower to guarantee valuable assets such as property, equipment, inventory, future earnings, etc. to secure a loan. Personal guarantees and collateral are standard measures used to secure small business loans, especially for new businesses or for business owners who have less-than-stellar credit. Neither of these measures are necessary to qualify for Paycheck Protection Program loans under the CARES Act.
Participating lenders cannot charge loan application, origination, guaranty, monthly administration, annual, or other fees that are usually incurred when procuring a small business loan. Additionally, SBA loans often come with the stipulation that borrowers must not be able to procure other types of business loans in order to qualify for a SBA loan. This requirement has also been removed from the Paycheck Protection Program eligibility criteria.
Loans made under this program have a maximum maturity of 10 years from the date of the loan application. Loan interest rates are guaranteed to be 4% or less. Impacted borrowers may also have their loan payments deferred for 6-12 months.
Impacted borrowers may only apply for this program under one lender. They can only receive the benefits of covered loans once. In order for the loan to be forgiven in full or part, the borrower must acknowledge that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. Borrowers must likewise ensure that loan funds are used for these purposes.
How to Apply for the Program
Small business owners who wish to avail the benefits of this program should apply for it directly through an SBA-approved lender. There are about 1,800 SBA lenders so chances are your current financial institution is on the list. At this time, the SBA has not published a comprehensive list of lenders but are encouraging small business owners to contact their financial institutions directly to determine if the institution is a qualifying lender.
Prospective borrowers are encouraged to begin the application process by completing the Paycheck Protection Program Application available through the U.S. Department of Treasury. This form will assist borrowers with gathering the information that they need to apply through their financial institutions.
Many lenders are currently in the process of developing internal policies, procedures, and processes for this program. The SBA indicates that lenders may begin processing applications as early as April 3, 2020. A number of lenders are set to present information about the roll-out of their programs in the coming days.
Need help preparing for COVID-19 loan, grant, and other financial assistance applications? Contact us so that we can help you navigate through the process.
One of the first things that I advise new business owners to do after they have established a legal business entity is to start building business credit. Business credit is just as important as personal credit as it serves the same purpose, which is establishing financial credibility and accountability. In the same way that an individual is required to have a decent and substantial credit history to borrow money for purchasing a car, home, etc., a business needs the same type of credit history to get loans for certain business expenses. This is usually not a concern in the beginning, but it can be a major factor as a business expands and grows.
Even if you have the start-up capital to finance your business venture, you may need to borrow money in the future. Banks and other financial institutions consider business credit history as a major factor when deciding on credit and loan approval, limits, and interest rates. This is why it is important to begin establishing business credit as soon as you have all the necessary qualifications to apply for business credit cards, loans, and lines of credit.
Business Credit Cards
Business credit cards operate in much the same way as personal credit cards. In fact, many of the major credit card companies use your personal credit history when they decide to issue you a business credit card. However once they issue a business credit card, the card activity is recorded as part of the business credit history, and in some cases as part of your personal credit history too.
In order to apply for a business credit card you will need to apply under the legal name of the business using the employer identification number, business structure information, business address, and business and personal financial data, etc. As mentioned earlier, you will also need to use your social security number since your personal credit history will be used to secure the business credit card. This is why it is not necessary for you to have an established scream of revenue in order to get approved for a business credit card.
There are several tiers of business credit cards that you may qualify for depending on your personal credit history and score. Many credit card companies issue secured, standard, and premium line business cards to start-up companies.
Secured credit cards are one of the best options for entrepreneurs who have little to no credit history or fair credit scores. This type of credit card requires the holder to secure the credit card with a cash deposit of variable amounts. The cash deposit amount is generally the credit card limit, which means that you are effectively using your own money to establish credit. Even though you are using your own money, the credit card company still reports your activity to credit reporting bureaus which allows you to build or rebuild credit.
Standard business cards are great for entrepreneurs with good to very good credit scores. These borrowers can generally get a standard business credit card limit of about $2,500 to $5,000 depending on their credit score. Premium credit cards are generally reserved for individuals with exceptional credit scores. These cards come with higher credit limits and optimal reward systems. Individuals with exceptional credit scores can usually obtain standard or premium credit card limits of $10,000 or more.
In addition to establishing business credit, business credit cards can help you keep business and personal expenses separate, increase your purchasing power, and take advantage of nifty reward programs.
Small Business Loans
Business owners usually only consider business loans when they have a direct need for a loan. This is generally a good strategy. It is best not to borrow money unless you need it for a specific purpose. And, if you need to it is vital that you pay the loan back according to the payment terms. Doing so will help you maintain and improve a good business credit score.
I typically don’t advocate loans for the mere sake of borrowing money. However, for the sake of establishing business credit a small business loan may be a viable option. If you think that you will have a need for larger business loans in the future it is best to start building your loan borrowing history by taking out smaller business loans even if you don’t have a specific need for one.
Loans may reflect differently on your business credit report than credit cards based on utilization and payment habits. Credit card usage can be variable and are considered revolving debt on credit reports, which means that your business credit score may fluctuate often depending on your credit card usage. On the other hand, loans are a great way to establish a more stable business credit history.
The benefit of business loans over credit cards is that interest rates tend to be lower and loan amounts can be much higher. Repayment terms are fixed and you don’t have to worry about variable interest or other fees often associated with credit cards.
For these reasons, business loans are generally more difficult to get approved. You may need collateral, a co-signer, or other guarantors to secure a business loan. This is why I recommend starting with smaller loans in the beginning phase of your business. Doing so will allow you to develop a relationship with your lender and establish your business loan borrowing history.
Business Line of Credit
Establishing a business line of credit is another way to build business credit. Small business lines of credit are not as well known as business credit cards and loans. However, they are just as viable of an option as credit cards and loans. In fact, a line of credit shares similar aspects of both options but operates more like a credit card than a loan in many regards.
Most business lines of credit are unsecured like credit cards though they tend to have higher limits similar to loans. Credit limits for lines of credit are usually between $10,000 to $100,000 – anything over this threshold must be secured. In this way, a business line of credit is generally easier to qualify for than a business loan because it doesn’t require the use of a guarantor, in most instances.
A business line of credit is considered revolving debt because borrowers only pay interest on the amount borrowed. For instance, you may qualify for a $50,000 line of credit but only borrow $10,000 from the line of credit initially. In this case, you will only pay interest on the $10,000 though the $50,000 is still available to you. This is the same way a credit card works.
It is important to note that a business typically needs to be in operation for a longer time frame to qualify for a line of credit. Additionally, repayment terms may be shorter or more frequent when borrowing from a line of credit. Some lenders require weekly repayment and some may require six-month or shorter repayment terms. As with credit cards and loans, line of credit utilization is reported to business credit bureaus and is used to determine business credit scores.
Interest rates on business lines of credit tend to be lower than rates and fees associated with credit cards. Credit limits are typically higher than business credit cards and approval is generally easier to obtain than with business loans.
As with personal credit, it is very important to borrow wisely and repay debt in a timely manner. As mentioned throughout this post, business credit card, loan, and line of credit activity is reported to credit bureaus. The ultimate goal is to ensure that you only borrow what you need and that you repay your debt in accordance with the terms and conditions of the creditor. Following these guidelines will help you build a strong credit history for future borrowing needs.
Need more guidance with your start-up? Contact us so that we can help you understand the critical steps that you need to take to get your business up and running.