The concept of business credit funding is to provide small business owners with the resources they need to get or keep their company afloat. Business credit is a key element in the credit decision making process because it is the account with which lenders will decide whether or not to extend a business loan to a business owner. The purpose of business credit financing is to provide business owners with the necessary funds to make a long term purchase or to pay off outstanding debts. For most small business owners, this type of funding is a necessity rather than a luxury.
Most banks and other lending institutions only extend business credit financing to businesses that have reasonable credit histories. This means that your business needs to be stable and profitable in order to qualify for a business credit line from a lender. While most small business loans are unsecured, there are some commercial financing options that carry a slightly higher interest rate because of the higher risk associated with the business itself.
A common strategy small business owners use for business credit financing is referred to as “baiting”. This method involves providing collateral, typically equity, against the loan. If the business does not generate enough sales revenue to cover the monthly installment on the loan, the lender will receive less than originally expected. However, should the business to generate sufficient revenue to pay the monthly installment on time, the lender may become willing to issue the commercial financing. The downside to this strategy is that it often requires the business owner to personally guaranty the loan. In most cases, the business credit financing is made based on the owner's personal credit score, which can greatly impact the final loan amount.
Commercial financing also comes in the form of merchant cash advances. These financing programs are best used for small, start-up businesses that do not have the resources to obtain traditional business credit financing. Instead, these loans are made for a business's recurring expenses, such as rent and utilities. In exchange for the reduced interest rate and other financial benefits, merchants must ensure that they keep their leases current.
The third type of business credit financing is referred to as line of credit. Unlike the other business financing options, this one is very similar to a credit card. It allows a business owner to draw against funds in order to meet ongoing expenses, which are subject to approval by the lender. These expenses include inventory purchases and supplies. Because they are based on credit scores, business credit cards require the business to make timely payments in order to avoid late fees and interest charges. However, business credit cards do not include any additional costs, such as annual fees.
Regardless of which business credit financing option is chosen, . . . . . . business owners must be sure that they are able to make the required payments. If a business owner delays payment, the business credit financing will be negatively affected, which can severely affect the business's credit rating. Additionally, businesses that are not able to meet their financial obligations will suffer financially, which can seriously affect their future growth and ability to stay afloat. Therefore, it is imperative that business owners take all necessary steps toward ensuring that they receive the appropriate financing for their growing business.