True or false? All businesses depend on cash flow to survive. True!
By Tanya Plotnikoff
Which is why it’s a good idea to know the basics (and a few of the finer details, too) about credit—what it is, why you might need it, and how you can access it. That’s why we’ve put together this helpful guide to teach you all you need to know.
What is Credit?
The formal definition of credit is: the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.
There are three major types of credit accounts you can access—revolving, installment, and open. Let’s take a closer look at all three, including some examples of each.
When we think of credit, the first thing that comes to mind is a credit card. Credit cards allow you to borrow money to make purchases. They are an example of revolving credit because your monthly payments fluctuate depending on how much of the credit you’ve used.
After you make a purchase on your credit card, you have a grace period of 25–30 days to pay back that specific amount of money. After that, the bank will start charging you interest on your purchases. Interest rates vary depending on your credit score, the lender, and the type of card.
As opposed to the fluctuating payments of a revolving account, with an installment account, you pay the card issuer a fixed monthly payment until the total amount of money is paid in full. Interest rates apply to this type of credit, as well, and continue to accrue as long as you have a balance. Loans are a good example of this type of credit, including student loans, auto loans, and mortgages.
Open accounts of credit are paid in full every month. They typically don’t have interest rates and often, are not included on your credit report. Examples of this type of credit includes home utilities and mobile phone plans.
Now that you know about the different types of credit, let’s talk about how you go about safely obtaining it and responsibly using it. This is where important factors like your credit score and history come into play.
It might seem counter-intuitive, but in order maintain a good credit score and continue to get approved for credit, you have to continue to build credit. This is important as you consider opening lines of credit for your business.
Why? A good credit score, as I’ve briefly touched on above, means lower interest rates and in general, cleaner financials. This is attractive to both lenders and potential vendors with whom you might do business.
How Do I Build Business Credit?
There are a few things you can do to build good credit for your business. The better history you have, the more money banks will be willing to let you borrow, and the lower your interest rates will be. Here are a few tips to jump start building your business credit now:
- Maintain Good Personal Credit: Most lenders and banks will check your personal credit and use those ratings to inform your approval. To keep your personal credit in the clear, make sure you always pay your bills on time and do your best to pay off your entire credit card balance at the end of every month. If you do have a balance that carries over from one month to another, don’t allow your debt to seep past 30% of your credit limit.
- Update Your Information with all three credit bureaus: There are three different credit bureaus in the United States that keep and maintain consumer credit reports. They are:
Because you never know which credit bureau a potential lender, vendor, or customer might consult to review your information, it’s important to keep all of them up to date.
- Plan for Credit and Apply Early: Don’t wait until you need a line of credit to apply for one. If you’re trying to build credit, apply for credit early on (and start using it) to help boost your score. For example, start using your business credit card right away, for smaller purchases. That way you get into the habit of paying it off each month, and you start developing a reliable and consistent payment history with your lender.
Understanding all the different variables of your credit score can be overwhelming, but just consider it another part of owning a business. Take it one step at a time, and soon enough, you’ll be a business credit expert.
Why Should I Use Credit?
At this point you might be asking yourself, what good is credit if it’s technically money I don’t have in the bank? That’s a smart question to ask, and it’s great that you’re proceeding into the world of credit with caution.
But the answer to this question is simple—cash flow.
Credit is a good tool for providing the cash flow you need, when you need it. As a small business owner, this is where credit becomes a very valuable component of your financial operations. While credit does, and always will, have the power to financially harm your business, it can have just as much of a positive effect on your growth and scalability.
Because we believe in helping small businesses and want to help driven entrepreneurs succeed, we’ve come up with a way to offer you access to working capital in the short-term on select invoices when you do business through Viewpost. Think of it as an alternative to credit that can have a similar immediacy.
For example, say you’re the owner of a bakery. You had a slower month than planned and you’re worried about paying your suppliers on time. Instead of waiting for more sales and paying your suppliers late, you can use Viewpost Express® dynamic discounting to request early payment from your large-order clients who have yet to pay your open invoices. In exchange for the early payment, you offer your clients a discount on the invoice total. The best part about dynamic discounting? It’s a risk-free way to access cash on demand without using credit.
If you’re struggling to build credit or get approved for a credit card right now, this could be a great solution for helping you continue to grow your business in the meantime. The Viewpost Express dynamic discounting tool was made for business owners like you who need to access working capital while you keep a close eye on your credit score.
Tanya Plotnikoff is the chief experience officer responsible for the design and deployment of company-wide programs at Viewpost.