Business credit is a type of credit that is specifically designed for businesses. It can be used to finance a variety of business expenses, such as inventory, equipment, and marketing. Business credit can also be used to establish a good credit history for your business, which can make it easier to get loans and other forms of financing in the future.
How business credit works
Business credit works in a similar way to personal credit. Lenders will look at your business’s credit score and credit history when deciding whether to approve you for a loan or other form of credit. Your business’s credit score is a three-digit number that ranges from 300 to 850. A higher credit score indicates that your business is a good credit risk.
Benefits of using business credit
There are a number of benefits to using business credit, including:
- Access to capital: Business credit can help you to access the capital you need to start, expand, or finance your business.
- Lower interest rates: Businesses with good credit scores typically qualify for lower interest rates on loans and other forms of credit.
- Improved credit history: Using business credit responsibly can help you to establish a good credit history for your business. This can make it easier to get loans and other forms of financing in the future.
How to use business credit responsibly
To use business credit responsibly, you should:
- Only borrow what you need. Don’t overextend yourself by borrowing more money than you can afford to repay.
- Make your payments on time and in full. Late payments can damage your business’s credit score.
- Keep your credit utilization ratio low. Your credit utilization ratio is the amount of credit you are using divided by the total amount of credit you have available. A lower credit utilization ratio indicates that you are not overextended and that you are managing your credit responsibly.
- Monitor your business’s credit report regularly. You can get a free copy of your business’s credit report once per year from each of the three major credit bureaus (Experian, Equifax, and TransUnion). Review your credit report carefully for any errors or inaccurate information.
Conclusion
Business credit can be a valuable tool for businesses of all sizes. It can help businesses to access capital, lower interest rates, and improve their credit history. To use business credit responsibly, it is important to borrow only what you need, make your payments on time and in full, keep your credit utilization ratio low, and monitor your business’s credit report regularly.
Here are some examples of how a business uses a credit to record:
- When a business buys inventory on credit, it records a credit to the Accounts Payable account. This increases the Accounts Payable account and represents the amount of money that the business owes to its supplier.
- When a business sells goods or services on credit, it records a credit to the Accounts Receivable account. This increases the Accounts Receivable account and represents the amount of money that the business is owed by its customers.
- When a business borrows money from a bank, it records a credit to the Notes Payable account. This increases the Notes Payable account and represents the amount of money that the business owes to the bank.
- When a business earns revenue, it records a credit to the Income Summary account. This increases the Income Summary account and represents the amount of revenue that the business has earned.
In all of these cases, the credit increases the account balance. This is because credits are used to record increases in liability, equity, revenue, and gain accounts.
