Vendor lines of credit serve two important roles for businesses seeking capital. They first give a business access to products and services based on “net terms” ranging from 15 to 60 days. Secondly, vendor lines of credit can help businesses build their credit scores. In order to build a solid foundation for business credit, businesses must have one bank loan, three business credit cards, and five vendor lines of credit established to build proper business credit.
Another benefit of vendor lines of credit is that they are a lot easier to obtain, than a conventional business loan. Most vendor lines of credit are not secured because collateral is not required to obtain the line of credit. Credit lines are available for all products and services imaginable including office equipment, computers, and even gas for company vehicles. There are more than 500,000 businesses that offer credit lines to other businesses. Out of these though, only 6,000 report your payment history. This means that approximately 1.2% of all of the vendor lines of credit available actually help you build your business credit scores. It goes one step further, and out of the 6,000 that report to the credit agencies roughly 1,000 will allow you to obtain the vendor credit line without using your personal credit history.
You are probably wondering what is so special about business credit scores, and why is it so important to build them up. Many business owners and other entrepreneurs don’t realize that business credit works exactly like personal credit. Without personal credit you can’t purchase a car or house. You have to have a history of paying on your open accounts in a timely manner. The same principal needs to be applied to your business that you would apply to your personal credit. You also want to separate your personal credit from your business credit. This is essential for anyone that wants to properly establish and grow business credit.
If you have vendor lines of credit open with the other 98.8% of businesses out there you will only gain the credit given to you. This does you no good for the future because you aren’t building your credit score while you are using that vendor credit line. The most efficient way to build your business credit history is to have credit accounts open with companies that will report your payment history. This will help you get closer to your goal of being able to borrow the money you need to really grow your business. You have to remember to build your credit first, and then attempt to get the large business loan you desire.
Another benefit of always ensuring that you build your business credit is that after your initial launch you will have the credit backing you to obtain more money for rapid expansion. You can grow your business quicker than your competition with the access to the cash you need. This creates an ease of mind for the business owner and the business itself.
Just knowing the importance of building your business credit using such things as vendor lines of credit won’t be enough on it’s own to get you the capital you want. There are many other aspects to obtaining financing. If you follow all of the steps you will be in a position to get the capital you need and deserve.