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What is Business Credit?

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  • Written By: N. Madison
  • Edited By: Niki Foster
  • Last Modified Date: 13 November 2016
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Business credit is a measure of an organization's ability to obtain goods or services based on a promise to pay for them later. This term can refer to the ability of a business to secure loan money as well. The goods, services, or cash obtained using this type of credit are usually not personally guaranteed by the owner or representative of the organization. Essentially, it allows for borrowing against the assets of the organization, instead of the owner's personal property.

Unlike items and services obtained using personal credit, those acquired with business credit are meant to be used for commercial reasons only. An organization may use this type of credit to obtain everything from office furniture and supplies to manufacturing equipment and employee uniforms. Often, businesses seek cash loans as well, using borrowed money to fund various start-up and operational endeavors.

Using business credit may pose less of a risk than personal credit to the owner of a business because he may not personally secure or guarantee any of the merchandise or services obtained. However, this is not always the case, as a personal credit check and owner's personal guarantee may be requested in some cases. Though such personal guarantees are more frequently required of new entities, some creditors may require them of even the most well-established businesses. This is especially true of organizations attempting to secure certain credit cards and loans.

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In some cases, the owner or owners of a business are held personally liable for the debts of the business. This liability can put business owners at risk of liens placed on personal property in the event that a business debt goes unpaid. For this reason, among others, it is wise to seek the advice of a lawyer during the initial structuring of a business and before seeking credit.

To obtain business credit, it is often necessary to complete a credit application with each individual vendor or creditor. Each organization typically has its own application process and guidelines for granting credit. While some companies have very stringent credit-eligibility standards, others are far less strict, extending credit with very few requirements.

Business credit is entirely different from personal credit. However, some business owners find their business and personal credit files link in some ways. In fact, some credit-reporting bureaus sell business credit reports, based not only on the pertinent information of the organization, but also on the personal credit of the owner.

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Mor
Post 2

@umbra21 - It's the small business credit cards that especially need to be watched. I think quite a few people get the credit card and keep thinking that it can all be paid back when the business gets rolling.

But the payments need to start before then. Never borrow more than you will be able to pay back. I know it might seem unprofessional, but if you can, you'd be better off borrowing from family and friends.

It might cause a different set of problems, but they aren't likely to take your house from you.

umbra21
Post 1

I know that it is standard practice now to go and get a loan based on business credit, but if you are starting up a small business you should be very careful about it. The author of the article is absolutely right, you should make sure a lawyer checks everything over and you understand the terms of the agreement before you sign a business credit loan.

Even though it might seem like it is only the business that will be harmed if you end up defaulting on the payments, if you are the owner of the business you might end up losing more than you planned to. Or even more than you can afford to lose.

Please don't get carried away. Even the brightest ideas can go belly up.

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