If you remember from my previous blogs, Credit Based Funding is one of the paths you can take to obtain the funding you need for your business. It’s the one funding path that focuses on personal and/or business credit and does not require proof of income to qualify. However, the one thing to note with this funding path is that it’s extremely important to use business credit rather than your personal credit. While some aren’t even aware that business credit is a thing, it’s really the goal you should aim for so you don’t have to rely on your personal credit for future financing needs.
So, what are the pros and cons of business credit funding?
Protects Personal Credit
As I just mentioned, you never want to use your personal credit for business purposes – unless it’s the only option you have. If you do have to go down that path, be sure to transition yourself to business credit cards as soon as possible and transfer any balances on your personal cards to the business cards. Doing this will ensure you protect your personal credit. The great thing about using business credit cards is that all reporting will go to your business credit report rather than your personal credit report. A big part of your personal credit is based on how much of the balance you are utilizing and using your business credit will not affect any utilization on your personal credit score. This separation is a huge benefit to you. Any debt you incur personally won’t affect your business credit and vice versa. This is great when it comes to purchasing a new home on the personal side or a new building or piece of equipment for your business.
Builds Business Credit
Just like personal credit cards build your personal credit, business cards do the same thing for your business credit. Building this credit and separating it from your personal credit is extremely important. Having this established will be helpful in obtaining future funding for your business as it grows. If you think of big, established companies, like Albertsons for example, do you think they ever have their personal credit looked at when it comes to expansion or obtaining more funding? No! These larger companies have worked to establish their business credit which should be the ultimate goal for all businesses. The big perk here is that all businesses can qualify for business credit, whether they’re established or just starting out.
Risk Management
With every new business comes risk. Actually, 65% of new businesses fail within the first 5 years. Having business credit cards allows you to decrease that risk and it’s especially helpful because most of them offer 0% interest for anywhere from 6-18 months. You can’t find that anywhere! Starting a business is already stressful so if you have the ability to obtain funding at 0% interest, it’s a no-brainer! Doing this allows you to obtain the funding you need to grow and expand your business as you need to.
No Collateral Required
As I’ve mentioned before, one of the great things about credit based funding is that no collateral is required. Utilizing business credit cards allows you to get the financing you need without having to worry about coming up with collateral and instead focuses on these 4 factors: Derogatories, Utilization, Age of File, and Inquires. Along with not needing any collateral, there is also no revenue verification involved which typically includes things like tax, bank, or financial statements. Have you ever heard of someone using their home as collateral to get a loan to fund their business? You don’t have to take that risk with business credit cards!
Flexibility and Continuous Access
One of the biggest benefits of business credit cards is the fact that they offer a lot of flexibility. Unlike a loan that requires you to pay the same amount every single month no matter what, a business credit card offers you the ability to only pay for what you use. For example, if your line of credit is for $20K and you only use $5K, you only have to pay for that $5K, even though you can still access the full amount of $20K. You also have continuous access to that line of credit rather than having to take out another loan when you use the full amount and ending up with two payments. Having this flexibility is so important when you’re trying to fund a business.
Tax Benefits
One final benefit I want to mention when it comes to business credit cards is that you have the ability to write off any fees or interest that you’ve paid. It is important to note here though that this does not apply to personal credit cards – another reason for you to ensure that you establish business credit. You don’t want to miss out on these important tax benefits when it comes to reaching your financial goals for your business.
Disadvantages of Business Credit Cards
While there really aren’t too many disadvantages of business credit cards, it is important to address them. One of them to keep in mind is that you need to have almost perfect credit in order to qualify for a business credit card. At Pennington Consulting Group, we can assist in building up your credit and structuring it the right way so you can take advantage of business credit cards for your business. If your business lacks credit, the lender will evaluate your personal credit to determine how much they can extend to your business. And it’s important to note that when you establish new business credit lines, you personally guarantee them so the lender can come after you personally if you default, very similar to when someone cosigns for you on a loan. The one difference here is that the personal guarantee for a line of credit on your business will typically only report to your business credit rather than your personal credit. Something else that can be seen as a disadvantage is that business credit is generally in the form of a credit card so access to cash is usually limited. There are a few options available if you need cash though, such as convenience checks from a lender, taking out a cash advance (but be prepared for outrageous fees), or you can reach out to us at Pennington Consulting group for help in turning credit lines into cash.
Overall, the pros of obtaining credit based funding definitely outweigh the cons. If you’re looking for flexibility, tax benefits, and limited risk that allows you to protect your personal credit, credit based funding is a great option for getting the funds you need to start, maintain or grow your business.
With over 13+ years in the lending industry, I run into this question at least a few times every day “How can I get money for my business or How can I get money to grow and expand my business! Well, I am glad to say the business funding resource book you have been waiting for is on the way.
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