Basic business tools – Part 2

Click on each credit-related tool to learn more.


Small business credit

Key Points

Loans & lines of credit

Loans are typically used to make large, one-time purchases. The process of borrowing for your business is similar to borrowing for yourself. However, when you get a personal loan, it’s usually to buy something you simply want to own – like a car or appliances. But when you borrow money for your business it should be for the purpose of improving or expanding your business and its profitability, such as getting a loan to buy equipment that will increase your production capacity or lower your production costs over time. A line of credit gives a business a flexible way to borrow money at any time and manage cash flow. The bank agrees to lend you up to a certain amount on an ongoing basis. You can use as much as you need (up to your limit) and pay back at least a minimum amount every month. You pay interest only on the amount you borrow. To learn more about the basics of borrowing money, see the topic Using Credit to Your Advantage.

Personal guarantee

When you want to borrow money, the lender will study the financial performance and credit history of your business to decide how much and what kind of credit to give you. They will also look at your personal financial picture. That’s because most lenders require a personal guarantee for most business credit. A personal guarantee means that an individual person, called the guarantor, signs a legal agreement promising to repay the loan if the business is unable to. If you’re planning to borrow money for your business, be sure that you clearly understand what your business – and you personally – are agreeing to. Consider getting legal advice before signing a loan agreement. To learn more about the basics of borrowing money, see the topic Using Credit to Your Advantage.

Credit cards

Business credit cards can be very convenient, especially for making smaller purchases and when traveling on business. Having a business credit card that is separate from your personal one makes it easy to identify your business expenses. Many credit card programs offer monthly or quarterly statements that show how much was spent in different expense categories. This can save you bookkeeping time. Most business credit card programs will let you have multiple cards, so you can give them to employees. To keep control of your employees’ spending, you can assign a spending limit to their cards. Some card programs even let you limit the kinds of purchases your employees can make – for example, only allowing them to purchase office supplies. Secured credit cards are ideal for businesses that are just starting out or for those that need to rebuild their business credit. To qualify, you’re normally required to open an account with a balance equal to the credit limit of the card.

Merchant card processing

It’s important to make doing business convenient for your customers. The more ways your customers can pay you, the easier it will be for them to buy. Credit card providers, including many banks, offer merchant card processing. These services allow you to accept credit card and debit card payments from your customers, including online. Research shows that consumers tend to buy more-expensive items and to spend more overall when they use a credit card. So accepting credit and debit cards might help your business make more sales and more dollars for each sale you make. Ask your local bank if they offer merchant card processing services and how much they charge.

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Basic business tools – Part 1 Basic business tools – Part 2 Scenario: Controlling cash & credit Create a business budget Maximize cash flow Manage your expenses Tips for compensating yourself