Ask any business owner and they will tell you how important it is to establish credit lines for your business. Purchases become easier as you don’t need to rely solely on cash and some of lines and credit cards even offer rewards and points which you can use for airline miles and other perks.
Another benefit of getting an unsecured credit line for your business is that you won’t need to use your personal credit for the business. This is a very good thing. First, your personal expenses should be separated from your business expenses. Second, this will also help your personal credit as high balances and frequent use associated with business charges can impact your credit score.
The best rule of thumb in establishing an unsecured credit line for your business is to start small. It doesn’t matter if you have excellent personal credit or not. Starting small give you the chance to build up a positive credit history. It also makes is easier to pay off the balances within one month. This is something which lenders view as a big plus.
You’ll notice that by starting small and paying off your balances that you will actually get offers to increase your business credit line. In fact, this is something that all major business credit card providers look for.
The next thing you need in an unsecured business credit line is flexibility. This way you can easily react to business conditions as they change. One of the best ways to do this is through a revolving credit line for business. This way, you can reuse the available credit as soon as you pay it. This sort of revolving credit line has numerous advantages and it means you don’t need to keep going back for approval every time you want to make a purchase.
Another flexible tool is purchase order financing. One common way is to use invoice discounting to get paid today. This can be a really useful option if your company is growing fast and needs short-term capital to buy raw materials. Remember you are essentially using the creditworthiness of your customers, so this form of finance might not be a good fit in all situations.
However, there are limits to this form of unsecured credit as the lenders in this space tend to be risk averse. As such, another unsecured credit option is to look into getting a working capital loan or line. In some instances, this is the simplest, smartest, and most strategic way to obtain unsecured business funding. Most of the lenders in this space have simplified application processes and in some cases, repayment is based on a percent of your daily or weekly sales instead of a fixed amount per month.
Remember that short-term loans are best suited for short-term needs. So always look at what you need the funding for, before deciding which unsecured credit type is the best fit. That being said, you will probably use all of the options mentioned above as some point during the life of your business. This is normal as sometimes you cash quick for an emergency, or you need to offset the costs of a large order from a customer.
Each unsecured credit type has its purpose and if you are not sure which one to choose then the best advice is to sit down with your accountant and map out a plan of action.
This is important as each option will have its own pros and cons. For example, many business credit cards will charge a premium for cash advances as this a red flag that something is wrong with the business. Providers will also be on the lookout for suspected fraudulent credit card activity, such as using your own credit card at your business. This is against the rules of most credit card processors and if caught you can lose the ability to process credit cards. As you can see, this is not a good way to get cash fast.
As mentioned, start small. Sure, you want to get a $250,000 credit line right off the bat, but this might not be realistic. It’s better to start with a $5,000 line and then build your business’ credit rating. In addition, options such as purchasing order financing and working capital loans have their place. Most importantly, remember to choose the right financing option for your need at the time.