5 Types of Credit You Need to Know About As A Business Owner

Published: 29 Mar - 2022 by Ben Rendle

As a business owner, you may often find yourself in need of credit to tide you over, particularly during the early days. From capital to invest in new equipment or marketing campaigns to short-term options to smooth over cash flow issues, credit is an important part of keeping your business afloat. Let's take a look at five key types of credit to be aware of as a business owner, and explore how each one can benefit your business.

#1 - Standard Business Loans

Standard business loans are probably the type of credit you think of first when you hear the term. They're a loan from a bank or other lending institution, typically used to finance a major purchase or investment in your business. The terms and interest rates vary depending on the lender, but standard business loans usually have a fixed repayment schedule and interest rate.

One of the biggest benefits of a standard business loan is that they can provide you with a large sum of money to invest in your business. This can be helpful for purchasing new equipment or expanding into new markets. However, be aware that these loans typically require a good credit  score to qualify, and can be difficult to obtain if you're just starting out.

If you're looking for a business loan, it's important to compare rates and terms from multiple lenders to find the best option for your needs. The best thing to do is work with a professional accountant to prepare a detailed business plan and financial statements to help you qualify for the best loan possible, and then go through your application together.

#2 - Line of Credit

A line of credit is a type of revolving credit, which means you can borrow and repay the money as needed, up to your approved credit limit. This makes lines of credit a great option for covering unexpected expenses or taking advantage of opportunities as they arise.

One benefit of using a line of credit instead of a standard business loan is that you  only pay interest on the money you actually borrow, rather than the full amount of the loan. This can save you money in the long run, particularly if you only need to draw on credit occasionally. 

Another advantage is that lines of credit usually have a lower interest rate than other types of loans, making them more affordable. However, keep in  mind that you'll need a good credit score to qualify, and you may be required to pay back the entire amount borrowed within a short period of time.

If you're interested in obtaining a line of credit for your business, talk to your accountant or banker about your options.

#3 - Business Credit Cards

A business credit card is a type of unsecured loan, meaning you don't need to put up any collateral to secure the loan. This makes them a good option for small businesses that may not have enough assets to use as collateral.

Business credit cards offer a variety of benefits, including:

  • A line of credit that can be used for a wide range of business expenses

  • Rewards such as cash back, airline miles, or points that can be redeemed for merchandise or travel

  • Low interest rates and no annual fees

  • Increased buying power and easier access to credit than personal credit cards

Like personal credit cards, it's important to carefully review the terms and conditions of a business credit card before you apply. Some cards have higher interest rates and fees than others, so it's important to find one that best suits your needs.

Make sure you're using the card for business expenses only. If you start using it for personal expenses, you'll quickly rack up interest  and fees, and it will be difficult to pay off the balance.

While lines of credit and standard business loans are the two most common types of credit, there are several other options available that may be more suitable for your needs. Let's take a look at two more:

#4 - Invoice Financing

Invoice  financing, also known as accounts receivable financing, is a type of loan that allows you to use your outstanding invoices as collateral. This can be a great option if you have customers who take a long time to pay their invoices.

One benefit of invoice financing is that it's easier to qualify for than other types of loans.  In most cases, you don't need a good credit score or collateral to get approved.

However, keep in mind that invoice financing typically has a higher interest rate than other types of loans, so it's important to compare rates from multiple lenders before you choose one.

You should also be aware that not all invoices can be used as collateral. In most cases, only invoices from creditworthy customers will be accepted.

#5 - Asset-Based Loans

Asset-based loans are a type of loan that's secured by the assets of your business. This means that if you can't repay the loan, the lender can seize and sell your assets to recoup their losses.

Asset-based loans are a good option for businesses that have a lot of assets, such as equipment, real estate, or inventory. They're also a good choice for businesses that are having trouble getting approved for a loan from a traditional lender.

One downside to asset-based loans is that they typically have higher interest rates than  other types of loans.  In addition, you may be required to put up your assets as collateral, which can leave you at risk if your business fails.

Final Thoughts

In this article, we've looked at five types of credit that business owners may want to consider. These include lines of credit, business credit cards, invoice financing, asset-based loans, and standard business loans.

Each type of credit has its own advantages and disadvantages, so it's important to do your research before you decide which one is right for you.

If you need help choosing the right type of credit for your business, talk to your accountant. They will be able to  help you to find the best option for your unique situation and enable you to secure the best rates and terms.


Arrange a Discovery Call
To optimise your experience on our website we use cookies.
Learn more.