How to create a business loan
The face of the business continues to change. Even before the 2020 pandemic hit, business market trends suggested that e-commerce growth would continue to be the big wave of the future. Businesses are learning to adapt to changes in the digital market and stay ahead of the curve by embracing e-commerce innovations.
As consumer spending continues to rise, businesses will need to invest to be competitive. This will require working capital and cash flow to purchase the software and technology needed to survive in the digital economy.
For businesses without significant working capital or high net worth investors, such as many small businesses and startups, the idea of creating trade credit has been brought up.
Below, ZDNet has all the information you need to create a business loan.
What is business credit?
At some point, entrepreneurs and business owners are considering borrowing money. Many have not accumulated enough capital and money to get started when starting a business.
Business credit allows a business owner or business to borrow money to expand their business, pay for necessary purchases, or expand their business. Of course, they have to repay that money with interest.
Some companies get to the point where they can keep their business running through profits, but most need a constant cash flow – good business credit allows it.
However, it is not as easy as going into a bank and getting large sums of money. Businesses must first work hard to build trade credit to qualify for the loans they need. It takes patience and the right knowledge to build business credit the right way.
How to build business credit the right way?
Most people are familiar with creating personal use credit – applying for a loan, buying a house or vehicle, or getting credit cards – creating business credit is not much different in principle.
How to choose a business structure?
Unless you are planning to be a sole proprietor, you must first establish your business as a separate entity from yourself. Failure to do so exposes you to personal liability should legal issues arise.
In addition, separating yourself from your business also brings benefits at tax time. The most common business entities are limited liability companies (LLCs) and corporations.
How to register your business?
Once the appropriate business structure is chosen, you must register your business and apply for a federal tax identification number with the IRS – known as an EIN. Without an EIN, you won’t be able to open business bank accounts or apply for business lines of credit.
How to establish a business credit profile?
Once your business entity is filed and registered, you can start building your business credit. To establish a trusted financial reputation among lenders, you will need to have a working business credit history.
Each lender will check your credit profile when you apply for a loan or line of credit. The lender must establish a relationship of trust with the borrower, ensuring that the borrowed money will be repaid. This is called “solvency”.
One way to start building that confidence is to open a business bank account.
Start creating business credit
There are many professional bank accounts for traditional banking and online banking. You need to find one that matches your business needs.
Consider these things when choosing a business bank account:
Is it reliable and secure? Make sure you open a bank account with a trusted, FDIC-registered and insured bank. Over time, you’ll also want to make sure that your bank is an equal opportunity lender in good standing; all reputable banks are.
Discover the services and management tools. Chances are, you want to apply for a business credit card; if so, what are the APR rates? What types of management tools do they offer for professional accounts?
Check the investment rates and maintenance costs. If you are looking to earn interest on your money, what are their APY rates? What are the minimum balances required to take advantage of these rates? Most banks have monthly maintenance fees, another factor to consider.
What is the help and support like? New business owners will benefit from a bank with professional help centers and financial advisors onsite or close at hand. If you’re always on the go, does the bank have an app for mobile banking?
Get a business credit card
Another way to build your business credit profile and grow your business credit is to get a business credit card. Business credit cards allow business owners to pay necessary expenses without huge cash flow while helping build a business credit history.
Most come with higher credit limits and bonuses that you won’t find with personal credit cards.
Here are some advantages:
More expenses for business tools: Business owners, especially startups, can use higher credit limits to invest in the software and business tools they may need. Business credit cards allow you to create business credit while increasing your cash flow.
Protection on purchases: Unlike cash-only purchasing methods, business credit cards often come with purchase protection – in the event of loss, theft, or damage.
Rewards and cashback: Many credit card companies offer rewards for spending, such as points or miles for travel. Some offer cashback bonuses after reaching certain spending thresholds.
Build the company’s credit history: Perhaps the most important benefit for our needs is the ability to create a trade credit history. Making your credit card payments on time or early is essential to building a reliable credit history. This will improve your business credit profile and your score with the credit bureaus.
Discover other forms of business credit
In addition to business credit cards, there are other ways to establish and develop business credit. These include different forms such as supplier credit, supplier credit, and service or retail credit.
Supplier credit : Supplier credits are a great way to build a reputation of trust with your business. Most businesses need a constant flow of supplies and inventory to keep their business going. Supplier credit is an agreement between you and a supplier that allows you to defer payment for supplies. This helps keep the cash flow working and allows you to build up credit as you make your payments.
Seller credit: Like vendor credits, vendor credits allow you to purchase services (or products) from vendors with short-term funding. These payments can be made with a business credit card, giving you more time until the benefits accrue. Again, making payments early or on time is essential.
Service credit: Service credits are generally the simplest form of credit creation outside of business credit cards. Service providers – the Internet, phone, television, or other utilities – allow business owners to accumulate credit when they make service payments.
Retail credit: Business owners can also build relationships with their favorite retailers; most offer in-store business credit cards. This is another way to build credit as you make payments.
Pay early (or at least on time): Again, it is important to pay these entities on time, but preferably early. It is equally important that these entities report the payments to the credit bureaus. This will guarantee a boost to your business credit profile.
Keep building and monitoring your business credit
Once your business credit profile is established and in good standing, you will have a better opportunity to diversify into other forms of lending – lines of credit and business loans.
Again, it is extremely important that these lenders report to the credit bureaus so that your credit profile and credit history continues to increase.
It is also essential to monitor your business credit profile to ensure that your file is up to date and free of errors. Unfortunately, fraudulent activity does occur and if you don’t regularly monitor your credit profile it can negatively impact your business credit.
Currently, three major companies handle corporate credit reports – Equifax, Experian, and Dun & Bradstreet. Each varies slightly in its reports, but each offers ways to monitor your credit score and reputation, and allows you to update business information if the need arises.
Building business credit isn’t complicated, but it takes time and dedication. This will ensure that your business is equipped and prepared for whatever the future may hold.