As you try to expand your business and wow your partners, there are certain hurdles you may encounter along the way. Say you want to invest in some much-needed equipment that could help you streamline production and hasten the overall process. But while pondering that decision you come to the conclusion that a loan is simply not the best choice at the moment. Perhaps you should think of business credit.
One of the pitfalls of being a small business owner is that you may often choose to mix business expenses with personal ones. When attempting to further your business even at the cost of personally guaranteeing your business debts, you end up affecting your own debt-to-income ratio.
But you’d be much better off deciding for a business credit. A business credit works differently than a personal loan. Most importantly, business credits are specially designed to help you find the funding you require without having to also commit to a personal loan.
There are many reasons to opt for a business credit. For one, they help you remain organized and easily separate business expenses from personal ones. Bookkeeping is also another matter. Come tax time, you’ll have a much simpler time identifying your deducible business expenses if they are separate from your personal ones.
“Paying for business expenses with your personal finances is never a good idea,” Inman’s Paul Oster notes.
In his article on business credit, Paul points out that it’s never a good idea to sacrifice your DTI (debt-to-income) ratio. Many lenders use this key metric to decide what amounts you can borrow. Yet this DTI ratio goes through the roof if you already have a mortgage, an auto loan and multiple credit cards. As such, you may even end up with a rejection on a business loan.
That’s where a business credit comes in. One of the many advantages of a business credit is that, even if you default a business credit loan, your personal credit will not suffer as a result. Many business credit cards come with reward programs but most importantly, you can even have saving opportunities in connection with your card. All large business credit card issuers have a savings program (Visa’s SavingsEdge, American Express’ OPEN Savings and MasterCard’s Easy Savings).
In the end, there is one major goal when considering a business credit: that of not having any business debts appearing on your personal credit report.
Of course, you need to pay attention to the conditions of your business credit. For one, note that business credit cards are no longer part of the Credit Card Act of 2009. Consequently, fees differ greatly. Make sure to read the fine print so that you’re not surprised with high interest rates or excessive fees.
Another thing to be weary of is employee abuse. Yes, you can use business credit to delegate purchasing. Your employees will therefore be allowed to make purchases on your behalf. But there’s a catch. Employee abuse associated with your business credit card is a reality, so make sure to set spending limits or even get specific about amounts.
Remember that when applying for business credit, you will need to use your EIN. When only the EIN number is used, that trade line reports ONLY on your business credit. In the end, your goal is to have your business supporting you and not the other way around so research business credit thoroughly and decide whether it is the step you need to take to advance your business.
Photo credits: 1