It is important for business owners to consider commercial credit lines, when financing their business to shield their personal credit scores from their business expenses. It is not uncommon for businesses to have busy months and typically during those busiest months there will be high expenses. Individuals that use personal credit cards and personal loans to finance these large expenses will likely see their personal credit scores suffer, which will make it more difficult to the individual to obtain a home loan, student loans, or any other kind of financial products.
There are many banks that offer commercial accounts that report ONLY to the business credit bureaus. Thus, it is important for business owners to have access to these types of accounts for financing their business expenses, without affecting their personal credit scores.
A popular way to financing business expenses is with commercial credit lines.
With credit lines, business owners can finance:
- Working Capital Expenses
- Inventory-Stocking Shelves
- Down Payments
- Marketing Campaigns
- Upgrading storefront
There are two main types of credit lines that business owners can consider:
- Commercial Credit cards
- Traditional Checkbook Lines of Credit
Most start up business owners (companies less than two years old, or, companies who have not generated significant revenue) will opt to obtain commercial credit cards to assist in financing business expenses, because these types do not require tax returns to get approved.
To qualify for commercial credit cards, a business will need the following:
- Existing business entity with a Tax ID number (Corporation, LLC, Sole Proprietorship)
- Business owner or a business partner with strong personal credit profile
- No collateral required
- Most all industries can get approved for commercial cards
Companies less than two years old, even startups, can receive significant card limits, while businesses more than two years old will typically see higher approved card limits.
Commercial credit cards typically come with a 0% interest introductory period on purchases, balance transfer or both. After that, APR’s can typically range between 7.99% – 17.99% annually.
NOTE: Interest on commercial cards is assessed monthly
Typically, after the commercial cards have been responsibly managed for six months, clients can expect to receive transfer checks in the mail. These checks allow the client to draw cash from their business cards at a 0% interest for a small fee (Typically 2-5% of the amount being transferred). These checks can be used to pay contractors, or to even deposit cash straight into your business bank account.
Many real estate investors find that these checks are useful for purchasing properties, or financing down payments. These transfer checks allow the client to utilize their business credit cards similar to a traditional line of credit. These checks typically expire after 30 days of being issued, but, several individuals have reported receiving new checks from the banks every other month while their account is kept open. Using transfer offers and transfer checks, many business owners have been able to maintain 0% interest on their business debts for several years.
Credit limit increases can be requested on commercial credit cards every six months, as long as they are responsibly managed. These credit limits can be quite generous. Commercial Credit cards are a highly FICO driven product, so, to ensure maximum approval limits on new business cards, the business owner should apply when their personal credit report is in the most favorable position.
A well qualified candidate for commercial credit cards will have a credit report with the following characteristics:
- 8 years of personal credit history
- No major delinquencies (Bankruptcies, foreclosures, tax liens collections)
- No minor delinquencies in the past two years (late payments)
- Less than 5 credit inquiries on each credit bureau, Experian, Equifax and Transunion
- 30% or less revolving utilization ratio (Total credit card debt divided by total credit card balances should be less than 30%)
- At least $5,000 worth of major bank credit card limits
- 700 or higher FICO scores.
If a company is more than two years old, and has strong income verified by its last two years tax returns, then, the company might consider Unsecured checkbook access lines of credit.
A Checkbook Access Line of Credit is an account that a client can draw cash from, and deposit straight into a business bank account immediately after approval. Checkbook lines of credit typically do not come with a 0% interest introductory period, but, they typically come with lower interest rates and higher approval limits than credit cards, since they are an income verified product. APR ‘s on Checkbook Access accounts can go as low as 5%, within interest assessed daily on the principle balance.
To qualify for unsecured checkbook access accounts, a business owner will typically need the following:
- Business entity with tax ID (LLC, Corp)
- Two years business tax returns, verifying revenues
- $100,000 or more net income annually
- All business owners must have a strong credit profile to get approved (similar to the credit requirements described above for commercial credit cards)
- Not in a restricted industry (investment, gambling, strip clubs, medical marijuana)
- Typically, no collateral required.
The benefit of Checkbook Access accounts is that the business owner can finance short term cash flow needs at any time, by transferring cash from the line of credit into their bank account. Clients can enjoy initial approval limits up to $50,000 per account with checkbook lines of credit, And of course, as long as these accounts are also responsibly managed, credit limit increases can be obtained every six months.
Whichever option the business owner decides to obtain, commercial cards, checkbook accounts or both, it is important for the client to obtain the accounts as early as possible, before the business owner gets into a money tight situation. Commercial credit lines give the business owner the ability to finance their business expenses without having to dig into emergency cash reserves.
On top of all this, building a business credit profile will also assist the business to obtain lower interest rate and better terms on business loans and SBA loans in the future.