Starting a business can be an exciting but challenging journey — especially financially. Credit is crucial for new business owners and entrepreneurs to establish and grow their ventures. It provides access to financing for initial investments, expansion, and cash flow management. Using credit correctly can positively impact your credit score, allowing you to seek out loans, receive better interest rates, and establish credibility for your overall business.
What is Credit?
Credit is the ability to borrow money with a promise to pay later. Credit can be found through financial institutions like banks or credit unions, as well as through credit card companies and other lenders.
It can be used for personal or business purposes, but it’s essential to understand the terms and conditions of credit agreements.
Why is Good Credit Necessary?
Good credit is essential because it can help you secure financing, build credibility with vendors and customers, and establish a strong foundation for your business’s long-term success. Maintaining good credit practices means avoiding financial difficulties and negative impacts on the business.
Best Practices for a Good Credit History
When seeking financing for your business, lenders will typically look at your personal credit history to assess your creditworthiness.
A poor credit score may make securing the capital you need to get your business off the ground more difficult. On the other hand, a good credit score can help you qualify for lower interest rates and better loan terms.
To build a good credit history as a new business owner or entrepreneur, it’s important to understand three truths about credit:
“A credit score is a numerical representation of someone’s creditworthiness. Lenders use credit scores as a grade to determine the likelihood of a borrower repaying their debts on time.” – Nancy Twine
1. Credit is not free money
Credit shouldn’t be considered as a way to get “extra” funds. Credit can help you obtain necessities immediately rather than saving up cash for an expense. Keeping this in mind will allow you to plan your use of credit more appropriately.
2. Credit requires discipline
Accumulating debt is easy. The American population has a total credit card balance of $986 billion, according to the Federal Reserve Bank of New York. To emphasize the first point, credit should only be utilized if you have the discipline to manage spending responsibly. (Budgeting can prevent overspending.)
3. Credit is accessibility
Credit can be intimidating, but it’s a tool to level accessibility. As new business owners and entrepreneurs, it can be challenging to rely on business loans. Many lenders require proof of profitability from your business, which can take years to establish. Crowdsourcing funds from friends and family or depending on personal savings is not always an option.
Turning to credit is a sensible and common practice that can benefit your business and ease your life.
Standard Credit Terms You Should Know
Terms and conditions of credit agreements can be convoluted and confusing. Be sure to read them thoroughly to understand your individualized contracts and what you’re ultimately signing up for. Here are five of the most common terms to familiarize yourself with:
Annual Percentage Rate (APR)
This is the interest rate you will be charged on any outstanding balance on your credit card. Prioritize credit card opportunities with the lowest APR to save money on interest charges.
Credit Limit
This is the maximum amount you can borrow on your credit card. Choose a credit card with a limit that matches your spending habits, repayment capabilities, and creditworthiness.
Balance Transfer Fee
Some credit cards allow you to transfer balances from other credit cards, but there is often a fee associated with this service. Be aware of the fee and factor it into your decision.
Rewards Program
Many credit cards offer rewards programs allowing you to earn points, miles, or cash back on purchases. (Gas, flights, office equipment, etc.) Consider what rewards program would most benefit your lifestyle and spending habits.
Annual Fee
Some credit cards charge a yearly fee for using the card. If you are considering a card with an annual fee, make sure the benefits of the card outweigh the cost of the fee.
Best Practices for Paying Off Credit Debt
Credit debt is manageable with a plan. Taking specific steps to pay off credit card debt and improve your financial stability. Begin by applying these five best practices:
Budget
Make a budget that considers all expenses, and stick to it. Budgets can decrease anxiety and create a structure for repayments, emergencies, and savings.
Pay off debt
Prioritize paying off high-interest debts first, as they accrue the most interest over time. Additionally, you can pay more than the minimum required to lower the overall balance and credit card utilization to raise your credit score.
Consolidate
Consider consolidating debt into a single lower-interest loan to reduce the amount paid in interest. This can simplify your repayment plans and help you save over time.
Negotiate
Negotiate with creditors to see if they will lower the interest rate or work out a payment plan. Loan terms may have flexibility, and payment due dates can be shifted to fit your budgeting needs.
Focus
Focus on making sure you’re generating more revenue to accelerate your debt repayment by creating strategies to increase sales or cut unnecessary expenses. Also try to use cash for expenses when possible to avoid excessive debt accumulation on credit.
Remember: Always read the fine print. Understanding the terms and conditions of any credit agreement before signing on the dotted line is crucial. With responsible use, credit can be a helpful tool to get your entrepreneurial dreams off the ground to achieve your business goals.
