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Small Business Loan Requirements – and How to Meet Them

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Reeling from these tough economic times, you may be considering a loan for your business for the first time.

How do you get a small business loan? Should you apply to an online lender? Try to get a loan through a bank? Go through the Small Business Administration (SBA) for financing?

Many loan requirements are the same for the application process. Lenders and the SBA have specific conditions you must meet in order to get a loan. But with some loans and lenders, there is a protection program to ensure that you are safe.

An SBA loan may have special requirements that differ from the requirements of traditional loans. Every lender uses certain evaluations to determine your ability to repay.

Lenders look at bank statements, assets in the business, financial statements, debt service coverage ratio, and personal and business credit score (present and history). Lenders also want you to have a sound business plan.



Get Your Ducks in a Row

Did you ever change the business name, physical address, or phone number? Are these changes on past bank statements, tax forms, incorporation papers, utility bills, and websites?

In other words, Joanie’s Pet Sitting is not the same as Joanie’s Pet Sitting LLC. Joanie’s Pet Sitting, Virginia Beach is not the same as Joanie’s Pet Sitting, Norfolk.

If a business name, address, or phone number changes, the change should be made on every license and document related to the business. You can’t rewrite former financial records. But you can include documentation that supports the business history. You can include a letter of explanation as well.

The main concern of a lender is to determine your ability to repay the loan. Here’s a look at the key pieces of the loan application puzzle.

Top 8 Small Business Loan Requirements

Here are the top 8 small business loan requirements and how to qualify for a loan:

Personal Credit Score

Your personal credit score carries a lot of weight in the business loan application process. For many types of business loans, when you as the owner of the business sign on the dotted line, you are guaranteeing payment of the loan.

This is especially true with fledgling small businesses that are still building a history of tax returns. Don’t worry if your business is relatively new. You may still get a loan if you have an excellent personal credit score and all the business owners have good credit scores. If your business has multiple owners, the lender may want to see a credit score from each. The loan amount will be closely tied to those scores.

Some lenders may require the business to be operational for a minimum of 2 years. If the business has 2 or more years behind it, lenders may look at a business credit score. That score comes from a business credit bureau, such as Dun & Bradstreet.

Action to take: Before applying, business owners should check their personal credit score to make sure all the information is correct. Get credit scores from each owner. Clear up any inaccuracies. Some credit report monitoring services have suggestions for improving your score, and you may be able to bump your score up a bit if you have time. In borderline cases, it could be enough to net you a better interest rate or other terms.

Work to improve your credit score. Schedule payments to make sure you make them on time, reduce your debt, open a business credit card and keep you utilization of available credit low.

Bank Statements and Ratings

What do lenders look for when they examine your bank records? Lenders look at seasonal fluctuations in income, debt to income ratio (see below), and tax obligations.

When you’re borrowing from a bank, the bank will assign a rating. The rating is the total amount of borrowing capacity you have from that bank.

The date you opened a business bank account is used as the start date for your business. The longer your business has been established, the more likely you are to qualify for a loan.

There are contributing factors to favorable bank ratings. Ideally, your average daily balance should be above $10,000 for 3 months. Manage your bank accounts to keep the average daily balance as high as possible. Avoid overdrawing your account, and set up overdraft protection.

It’s not enough to just have the money sitting there. Your business should be generating a steady volume of regular deposits.

You also should have a bank reference, who is the person you work with at the bank. In other words, a person who will vouch for you as bank officials consider your loan.

Revenue/Balance Sheet

Of course, revenue is important. A business must make money to stay afloat, and pay the requested loan.

But revenue is just one of the important numbers that help businesses get loans. Revenue is part of a balance sheet.

The balance sheet includes assets, liability and owner equity. The assets of businesses are subtracted from the liabilities of businesses. The calculated amount of owner equity is added to that number. That number is an estimate of what the business is worth. That number must be reasonable in comparison to the loan amount sought.

Action to take: Chip away at the amount of liability every chance you get. It’s a lot like paying off a credit card. Just paying interest keeps you treading water. Applying even a small amount of money monthly to principal debt will show a positive change and attention to the health of the business.

Debt-to-Income Ratio / Cash Flow

Think of the balance sheet as a snapshot of your business. The debt-to-income ratio, or cash flow, is a monthly snapshot.

Each month, after expenses are paid, how much money is left? This number shows the lender how much of a loan payment you may be able to handle monthly.

Lenders may also do a comparison of accounts receivable to accounts payable. You won’t be able to “pick your best month” as an example. The lender will do that comparison the month you are asking for a business loan.

What’s the number that a lender wants to see for a debt service coverage ratio? A lender typically wants to arrive at a calculation that is less than 1.25 or 1.35 times your expenses. That calculation of expenses will include the payments you’d be making on the loan you are seeking.

How does the lender get to that debt service coverage ratio number? Typically, the lender divides the annual net operating income by the total principal and interest of all debt obligations.

Here are the highlights of what a lender will analyze: gross margin, cash flow, debt to equity ratio, accounts payable, accounts receivable and earnings (before interest, taxes, depreciation and amortization).

Lenders prefer to see financial statements that have been audited by a certified public accountant. You can have financials reviewed by a CPA – which is faster and cheaper – but some lenders require audited financials. Find out what the lender requires.

Action to take: Accounts receivable will only include goods or services that have already been invoiced. Make sure you are invoicing promptly. And of course, make sure you are paying your bills promptly. Proving that you are up to date with sending out bills and paying bills shows the lender that you have a good process in place for money management.

2+ Years in Business

For a Small Business Administration lump-sum loan, your business has to have been running for 2 years. There are SBA loans that don’t have that requirement, such as many of the line-of-credit loans and the SBA microloans.

To get a business loan from the SBA, you’ll need to present tax returns for the past two years that prove the existence of the business.

Action to take: Organize your tax returns. Put them on a disc or into another format that is easy to provide to a lender. Provide a business credit report. Provide the applicant’s credit report and get copies of the credit scores of all owners.

Type of Industry

To get an SBA loan, businesses must meet the requirements according to the SBA’s definitions of small business. Those definitions vary by type of industry.

The SBA definition of small business is two-part: by the number of employees or by the average annual receipts (gross income).

The gross income is averaged over 3 to 5 years. If the business hasn’t been around for more than a year, the gross income is calculated by the average weekly income times 52.

The number of employees is calculated as the average number of employees per pay period. This includes part-time employees. The average is calculated using a 12-month period.

For a look at the SBA requirements under the type of industry, go to www.sba.gov/document/support–table-size-standards. It’s an interesting read and may make you realize just how big or small some small businesses are.

For example, a cheese manufacturer can have up to 1,250 employees, and be considered, well, small cheese. A flower or nursery stock wholesaler may have no more than 100 employees.

Businesses can make a lot of money and still be considered small. For example, a home health company can have yearly revenue of up to $16.5 million. A baked goods store can make up to $8 million.

Action to take: If you think your business is too big for a small business loan, think again. Check the Type of Industry chart to learn the requirements. You may be pleasantly surprised to find out you can apply for a small business loan. Get familiar with the numbers for employees by the type of business. Since part-timers are also counted, you might be getting close to going over the requirements. To qualify for an SBA loan – with better rates and longer payback terms – you may consider combining part-time positions to full time.

Collateral or Assets

Not all lenders require that you put up collateral to get a loan for business use. But for those lenders that do, you may have to list assets on your loan application.

Lenders like to see assets that they can easily use (seize) if needed to cover your loan obligation if you fail to repay.

Assets include business real estate, inventory and business equipment. It’s important to know that collateral can also include funds from accounts receivable. That can include monies that have been invoiced but haven’t yet been paid to the business.

If you can’t pay the loan, the lender can seize the assets. For real estate and equipment loans, a UCC (Uniform Commercial Code) statement may be filed to claim accounts receivable and other collateral.

If you don’t have sufficient assets, a lender may require personal guarantees. This is not a good option. This type of loan backing puts your personal assets at risk as well as the assets of the company.

Action to take: Yikes! Imagining a future where you lose business real estate and inventory may give you pause as you list those items on your loan application. Scary stuff. But it’s a given that those who are confident enough to start and operate a business have already demonstrated determination and boldness. Taking out a business loan is a risk, but growth doesn’t come without risk.

Business Plan

Lenders don’t often ask to see a business plan from those seeking loans for businesses. But adding information about the plan to your application may make your business stand out from others looking for a loan.

It’s like adding a brilliant cover letter to your resume. Of course, the application information includes bank statements, information about the owner’s (or owners’) credit score.

You may also include information about the nuts and bolts of your company. Let the lender know what you do and how you make money.

Also, include information about how the loan fits into your plans for the business. Let the lender know how you place the spend the proceeds of the loan. Provide realistic financial projections for future growth

If applicable, include market information and details on the status of your business niche. Describe how demand for your products and services is growing. Make projections to predict future growth.

Action to take: As you prepare to apply for the business loan, gather the paperwork needed to document your business plan. Include bank statements, information about personal credit/credit score and business expenses. These are the black and white proof of your ability on paper to pay the loan.

Add the missing piece to make your application for a business loan stand out from others. The average person on a lender review team may have no knowledge of what your business is.

For example, let’s use a business that makes something called a Skid Plate. Piece of metal that goes under a car, huh? Would a lender want to grant a business loan for a company expansion? What if the lender knew that the Skid Plate was a patented new product, in huge demand in the race car industry, primarily NASCAR?

By adding an explanatory description of the business, you will be more likely to get a business loan.

FAQs About Qualifying for a Loan

Let’s review some quick facts about the application process for business loans.

Who Can Apply for a Small Business Loan?

Any small business can apply for a loan. You should be making a profit and have a good credit score. You should not be involved in any default action by any entity, including the US government. People in the loan business don’t like that kind of stuff.

If the business owner is going for a loan through the SBA, the requirements are different. The SBA requires that your business operates within the United States and has been operating for a minimum of 2 years. If you can’t meet those qualifications, don’t bother going through the application process.

Are Small Business Loans Hard to Get?

The business loans are not hard to get if the company has owners with good personal credit and has been making money.

If you or any of the company owners (20% ownership or more) have a bad credit score, you have little chance of getting loans through the SBA. The SBA won’t give loans to a businesses which aren’t making money. A startup entity may try for a microloan.

You may find although you were stressed out about how to land a business loan, the process was easy. If you’re already running a company, you’re good with paperwork. Or you’ve hired somebody who’s good with paperwork!

One of the main requirements for getting loans is being organized. Get your paperwork stuff together and go for it. Today you have more options than ever for getting business loans.

For more information see the Small Business Credit Survey1.

What Documentation Must I Provide?

Lenders require documentation for business loans and it varies by the type of loan. At a minimum, you will need to provide income tax returns, your credit score, bank account information, a business financial statement, and personal identification such as a driver’s license. For more information about loan paperwork, go to Business Loan Documents to Provide.

What is the Minimum Credit Score for a Small Business Loan?

Most lenders require a minimum credit score of 600-680 for a small business loan. That’s a minimum requirement for business loans from most lenders.

People who get a business loan from an online lender may be able to get around that qualification. Online lenders considering loans often value business revenue more highly. Do some shopping, as the loan amount is typically smaller with varying interest rates.

How Much Can I Borrow on a Business Loan?

The amount of money lenders award is directly connected to how much you can afford. It won’t be how much you think you can afford. It will be how much the lender determines you can afford.

That’s a good thing. A reputable lender has your back and doesn’t want you to fail.

Summing Up

It’s no shame to need a loan for your business. In fact, obtaining a loan for future expansions or growth is a standard part of nearly every business plan.

Getting a loan to expand the business is not a one time venture in a business plan. Often business owners take out and pay off a series of loans during the course of doing business. You can use the loans to finance purchases, such as real estate, equipment or fleet vehicles.

Business owners historically have borrowed about $600 billion each year, according to a study by the SBA. Typically about 40% of small company owners borrow money each year. And that doesn’t mean that business owners are landing huge loans.

The average size of a business loan, since 2016, has been about $600,000. But many of those applying for a loan borrow much less. More than half of the business applied for loans of less than $100,000.

It’s important to understand what lenders are reviewing when you apply for a loan. Understanding what’s important to get a loan will help you improve your chances, now and in the future.

Although additional paperwork is required for an SBA loan, you may be pleased to find that it is easier to qualify for one of their options. In fact, business owners often get SBA loans after being turned down for a traditional loan.

Yes, it can take some time to complete the application and get the loan. On the plus side, terms range from five to twenty-five years for paying off the loan. Loan interest rates are priced according to risk, which is also standard practice with conventional commercial loans.

No matter what type of business you have, it stands to reason that someday you’ll need a loan for improvements and growth. Take steps now that will help you qualify for a small business loan.

Information Sources

1 Fed Small Business. “Small Business Credit Survey

Image: Depositphotos.com




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Fall River Man Charged With Stealing Unemployment Benefits

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BOSTON – Six Massachusetts residents have been charged in federal court with using stolen identities to obtain official IDs and governments benefits, including a Fall River man.

Antonio De Carvalho Vicente, 59, a Brazilian national illegally residing in Fall River, allegedly submitted an application for Pandemic Unemployment Assistance benefits using another person’s name and Social Security number, according to a media release from the office of U.S. Attorney Andrew E. Lelling.

De Carvalho Vicente allegedly received weekly payments of $600 under the PUA program, although the Massachusetts Department of Unemployment Assistance later ceased payments after flagging a suspected identity issue, Lelling’s office said. The release did not say how much money the man allegedly collected.

Last week in Boston, De Carvalho Vicente was charged with theft of government funds. The charge provides for up to 10 years in prison, three years of supervised release, and a fine of $250,000.

Five other defendants, including people from Lawrence, Roxbury, and Roslindale, allegedly used Social Security numbers and other identifiers to obtain, for example, Massachusetts driver’s licenses, Mass Health benefits, and unemployment assistance under the Coronavirus Aid, Relief, and Economic Security Act, Lelling’s office said.

“Identity fraud takes a tremendous toll on its victims,” Lelling said in a statement. “Individuals whose identities have been misused can face difficulties obtaining health care benefits, Social Security benefits or unemployment benefits, and are often left dealing with collateral consequences such as tax liability, bad credit and outstanding arrest warrants in their names. We will continue to hold accountable those engaged in identity fraud.”

Michael Shea, Acting Special Agent in Charge of Homeland Security Investigations in Boston, issued his own statement:

“These arrests mark an important landmark in the fight to ensure that benefits owed to American citizens go to whom they belong and not to those illegally present in our country,” said Shea.  “This is an important enforcement metric reached in the fight against benefit theft crimes, which are especially egregious during today’s these times of serious economic and public health concerns.”

Shea extolled the “tireless, dedicated team work of those partners who make up the Document and Benefit Fraud Task Force” and praised Lelling, the U.S. Attorney for Massachusetts, “whose unprecedented commitment to prosecuting these crimes has never wavered.”

Phillip M. Coyne, Special Agent in Charge at the Office of the Inspector General of the Department of Health and Human Services regional office in Boston, took the opportunity to chime in:

“The Medicaid program is a partnership between the federal government and the states to provide healthcare to some of the most vulnerable members of society,” said Coyne. “Medical identity theft jeopardizes the safety of its victims while disregarding the taxpayers who ultimately bear the cost. We will continue to root out imposters whose actions threaten the integrity of our healthcare system.”

Since July 2018, 50 people have been charged in connection with document, identity and benefit fraud through investigations by Homeland Security’s document and benefit fraud task force, a “specialized investigative group comprising personnel from various state, local and federal agencies with expertise in detecting, deterring and disrupting organizations and individuals involved in various types of document, identity and benefit fraud schemes.”

The task force investigates people who allegedly obtained stolen identities of U.S. citizens living in Puerto Rico to fraudulently obtain documents and public benefits, Lelling’s office said.

Lelling acknowledged a host of partners in the investigations, including police departments in Fall River and Dartmouth.



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Self-Employment, Freelancing, and Auto Loans

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With unemployment hitting record highs this year, we’ve also seen an increase in people becoming self-employed by starting to freelance or picking up a side hustle in an attempt to make extra cash. What does this mean in terms of your ability to take on a car loan, though?

Proving Your Income While Self-Employed or Freelancing

Self-Employment, Freelancing, and Auto LoansOne of the cornerstones of getting approved for an auto loan is proving you have enough income to pay for the vehicle. With a W-2 income (when you work for someone else), this simply means having a recent check stub that proves a monthly income that meets the lender’s minimum requirement, and shows your year-to-date income.

For people who are self-employed or freelancers, this means you have 1099 income (when you work for yourself or you’re a contractor). Some lenders may not accept borrowers that are self-employed, and whether or not they do can depend on your credit score.

Borrowers who are self-employed may need to provide copies of their tax returns to prove their income. However, if you have good credit, a traditional car lender may not ask for these. They may only ask for bank statements or deposit slips as proof of income.

However, expect to need more if your credit is poor.

Proof of Self-Employment Income and Subprime Lenders

For borrowers who are applying with a subprime auto lender for their next car loan due to a lower credit score, proof of income is a big factor. Subprime lenders look for stability in their borrowers outside of their credit score, and this means they typically verify work history and income to determine your ability to take on an auto loan.

If you’re self-employed or a freelancer with bad credit, then expect a subprime lender to ask for two or three years of your tax returns for proof that you can meet the income requirements. Your tax returns also prove that your income is taxed and reported.

Many people wonder if you can use bank statements to prove your income with a subprime lender. Unfortunately, bank statements don’t show that your income is reported, just that it’s deposited in your account, so subprime lenders almost always don’t accept them as proof of income.

Your tax returns can also prove your work history, since it can show a consistent source of income. Many subprime lenders look at your work history going back three years, and they usually require that you’ve been at your current job for at least six months to one year.

While subprime lenders have some stringent requirements for their car loans, it’s all in an effort to make sure that you have the ability, stability, and willingness to handle the loan. Their auto loans are also reported to the credit bureaus, which means there’s a chance for credit repair with timely payments.

If you can’t prove your income or work history with tax returns, then you may have to look into other car lending options.

Self-Employment and BHPH Dealerships

If your credit score is low, you’re self-employed, and your tax returns don’t prove your income, then you’re likely to need a buy here pay here (BHPH) dealership to get into an auto loan.

BHPH dealers have double roles, since they’re also your lender. All the car shopping and financing is done at the same location, so it’s a one-stop-shop experience. The biggest plus to these dealerships is that they usually aren’t concerned with what’s on your credit reports, so a lower credit score wouldn’t come in between you and a vehicle.

These dealers often aren’t as concerned about where your income is coming from, as long as you have enough to prove you can pay for the car. Since BHPH dealerships don’t have to rely on a third-party lender to approve you for financing, they tend to have their own means of verifying income.

Some requirements of a BHPH dealer usually include a down payment and some form of proof of income. On average, BHPH dealerships tend to assign higher than average interest rates on their auto loans, so it’s something to be mindful of. BHPH dealers may not report your car loan to the credit bureaus, so ask about their reporting practices if you’re concerned about credit repair.

Ready to Find a Dealership?

Finding the right lender for your income situation can be a struggle, especially if you’re dealing with credit issues. However, locating the right lender doesn’t have to be a hassle, and we want to help.

Here at Auto Credit Express, we’ve produced a network of dealerships that spans across the country. We match bad credit borrowers to dealers that are signed up lenders that work with unique credit situations. Get started right now by completing our free auto loan request form, and we’ll look for a dealership in your area without any obligation.

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What Is a Line of Credit vs. Credit Card

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Borrowing money is par for the course when you run a small business – emergencies arise and opportunities pop up, and both require quick access to cash. For many small business owners, it’s a toss-up between taking out a line of credit or putting expenses on a credit card. Deciding which funding method makes sense for you depends on your credit score, funding needs and the type of business you’re running.

 

Editor’s note: Looking for the right loan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

What is a line of credit?

A line of credit is a revolving loan that allows business owners to draw down money as they need it. The money can be used to address business expenses or to bankroll growth. There is no lump sum disbursement with a revolving line of credit, it works like a credit card. You only pay interest on the money you use.

How does a revolving line of credit work?

A revolving line of credit is a business loan that you can continually drawdown and repay. The credit limit on lines of credit typically range from $1,000 to $250,000, although some lenders will go even higher.

A small business line of credit is renewed annually, with interest accruing once you draw down money. Most have a variable interest rate, which means it changes with the prevailing interest rate in the market.

To obtain a line of credit, you and your business undergo a credit review in which your credit history is picked apart. That will determine the interest rate and credit line. In some cases, a personal guarantee is required to win approval for a revolving credit line.

 “Lines of credit are harder to get than a business credit card,” said Ted Rossman an industry analyst at CreditCards.com. “You have to be in business for at least three years and have at least $250,000 in annual revenue. Some online lenders lower the threshold.”

What are the types of lines of credit to consider?

There are two main types of business lines of credit: secured and unsecured.

  • Secured lines of credit require the business owner to offer collateral. If the debt goes unpaid the lender gets the piece of equipment or real estate. Secured lines of credit tend to have higher limits and lower interest rates because you have skin in the game. Secured lines of credit are required for funding of more than $100,000.
  • Unsecured lines of credit don’t require you to pledge collateral, but you may have to sign a personal guarantee. That means if your business doesn’t pay back the money, the bank or lender can come after your personal assets. Unsecured lines of credit tend to have lower limits and higher interest rates. Many unsecured credit lines have a credit limit from $10,000 to $100,000.

“A personal guarantee can be required if your business doesn’t have paperwork or you’re a sole proprietor,” said Michael Levin, a professor at Otterbein University. “They want proof you can pay the loan back.”

When should you choose a line of credit?

There are several reasons why a business owner would want to use a line of credit, including these four scenarios.

  1. Fund growth: Business owners in growth mode can benefit from a business line of credit. It can be used to purchase new equipment, launch a marketing campaign, or otherwise grow your enterprise. “If you are expanding your business or entering a new market a business line of credit makes sense,” said Levin.
  2. Fill cash-flow gaps: Many small businesses don’t get paid on the spot for their services. Sometimes it can take sixty to ninety days. That can negatively impact cash flow. A line of credit can be used to fill any gaps while you await payment.
  3. Peace of mind: Unexpected emergencies and expenses is part of running a business. If you aren’t prepared, it could spell your business’s demise. A line of credit is insurance against that, acting as a cushion when you need cash.
  4. Builds your business credit rating: If you maintain your line of credit, it will be reflected in your business credit score. The higher that is, the lower the cost of future borrowing.

How do I get a line of credit?

Business owners have options when applying for a line of credit. Banks and credit unions offer business lines of credit, as do credit card issuers and online lenders. It’s important to shop around since the interest rate will vary from one lender to the next. Levin said to start with your existing financial institution and take it from there. They already have a relationship with you and may offer deals if you have a business banking account.

Online lenders are another option. They tend to be more lenient than banks in approving borrowers, but the interest rate may be higher.

“A general rule of thumb: for banks, you have to be in business for three years and have $250,000 in annual revenue; for online players, it’s one year and $100,000,” said Rossman.

What is a business credit card?

A business credit card is also a revolving line of credit that can be used to make purchases. Credit cardholders pay annual interest and fees, otherwise known as the annual percentage rate (APR). Many business credit cards have rewards and loyalty programs that give you cash back and/or points on purchases.

How does a business credit card work?

Business credit cards act the same way that personal credit cards do. You use them for purchases online and in stores and are required to pay a monthly balance. If you don’t pay the entire amount, it carries over to the next pay period and interest is tacked on. Credit card debt can get expensive, particularly if the APR is high. Also, some credit card issuers charge an annual fee.

Business credit card issuers look at your personal and business credit scores when approving you for credit. If you have a high credit score, you’ll get a lower interest rate on your card than someone with a poor credit score. If you default on your credit card it will have a negative impact on your personal credit score and standing.

Business credit cards have a lot of perks if you use them responsibly. To get your business, credit card companies will lure you with generous rewards and bonuses. They know businesses tend to spend a lot of money each month and they will go to great lengths to win your business. Most offer 0% introductory APR, sign-up bonus, and generous cashback or point on purchases.

When should you choose a business credit card?

Business credit cards can be very useful for business owners, granted they are paying off the balance each month and avoid racking up credit card debt. Here’s a look at three of the big reasons why you may want to use a business credit card.

  1. Rewards you for purchases: A big perk of using a business credit card for purchases is the rewards. From cashback to free flights, business owners can rack up serious cash and rewards with a credit card.
  2. Prevents comingling of accounts: Having a business credit card helps you keep business and personal expenses separate. Whether you’re just starting out or have been in business for years, best practice is to have a separate business and personal checking account. This applies to credit cards too. Having a business credit card helps you keep your expenses separate and also makes it easier to track them.
  3. Builds your business credit score: Just like a line of credit a business credit card can help you establish or build your credit score. If you use the card responsibly, your rating with the credit rating bureaus will increase over time. That will make it easier and cheaper to borrow money the next time around. A lower monthly payment on future credit card debt is welcome news to business owners.

Line of credit vs credit card: which should you choose?

There are several differences between lines of credit and business credit cards. Which one makes sense for you depends on your credit standing, funding needs and business type. Consider the following four questions.

  • Which can you qualify for? Business credit lines are harder to get than business credit cards, requiring you to have an established operation. According to Rossman, the interest rate on both products are in similar ranges, although you may pay more with a credit card depending on your credit score. If you and/or your business don’t have stellar credit, you have a better chance of getting approved for a business credit card than credit line. [Read related article: How to Apply for a Business Credit Card if You Have Bad Credit]
  • How established is your business? If you are a sole proprietor or a new business owner who doesn’t yet have any financial documentation for your business, a credit card is the better choice. Typically, with a business line of credit, lenders require you to have one to three years in business and $100,000 to $250,000 in annual sales.
  • How do you plan to use it? If you need money to make a large one-time purchase or for small expenses like office supplies, a business credit card makes more sense. If it’s for large recurring expenses like inventory purchases, emergencies or to fund growth, a credit line is a better option.
  • Do you travel or make a lot of small purchases for your business? If you travel a lot for business or have a lot of small, regular purchases, a business credit card may be the better option because you can rack up a lot of miles and/or cashback rewards, granted you pay your balance each month.

“It depends on the type of business you have. If you do a lot of traveling as part of your business than a business credit card makes sense,” said Levin. “If you are trying to structurally increase your business, a business line of credit makes more sense.”

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