By Yhordan Serpentini | June 2, 2023
Credit is a vital aspect of modern-day life. It is a system that allows individuals and businesses to borrow money and pay it back over time; however, credit is not a one-size-fits-all solution. There are several types of credit that can be used in business, the two main types being business credit and consumer credit. If you aren’t familiar with both types, each has its unique benefits, drawbacks, and eligibility criteria which you must know before applying for or accepting credit. In today’s blog, we’ll explore the fundamentals of business and consumer credit, including what they are, their benefits, who is eligible, and what the differences between the two credits are.
What Is Business Credit?
Business credit is very straightforward; It’s a separate line of credit tied to a company entity that gives your business the ability to borrow from a credit lender. Banks and lenders will still base your business’s level of creditworthiness—that being reliability, credibility, and ability to pay debts on time—on your business credit score. Just like a regular credit score, a business credit score will influence your access to credit since it works as an indicator of how you’ll handle your debts based on your debt/loan/credit history. The higher the score, the better.
The Benefits of Business Credit
There are several benefits to having a business credit line available to small business owners. First and foremost, it enables businesses to access capital as a form of funding that they might not otherwise have access to. If your business is in desperate need of capital for operational expenses, purchasing inventory, or hiring new employees, business credit is exactly what will solve those issues— temporarily, that is.
Another great benefit of business credit is that it can help businesses establish a separate credit profile from their personal credit. This separation can be a critical component for business owners as it protects their personal credit score from any negative impact due to business-related debt. In other words, it will act as an insurance policy that will alienate any damaging effect that your small business could cause on your personal credit score, especially if it, unfortunately, doesn’t work out in the long run.
Who Is Eligible For Business Credit?
As previously mentioned, a business credit is a line of credit that is tied to a business entity, rather than an individual one. This means that ONLY any business entity can be eligible for business credit, including sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. That being said, eligibility criteria vary depending on the lender and the type of credit being offered. Generally, lenders will look at a company’s credit score, annual revenue, and time in business when evaluating a business’s creditworthiness, as well as other factors that could affect your ability to pay the debt back in the future.
What Is Consumer Credit?
Consumer credit is a line of credit that enables individuals with the ability to borrow money and pay it back over time. Types of consumer credit that you are probably most familiar with include credit cards, personal loans, bank loans, and auto loans, among other forms of credit. Consumer credit, unlike business credit, is based on an individual’s creditworthiness, which is determined by their personal credit score, income, and other factors.
The Benefits of Consumer Credit
Every type of credit has its pros and cons, and consumer credit is no different in that aspect. A great benefit to having consumer credit is that it enables you, as an individual, to access funding that you might not otherwise have access to, such as purchasing a car, a home, a phone, or even if it is used for emergencies only. Additionally, it can help individuals establish a credit history, which is a crucial necessity for purchasing most things with credit.
Another fantastic benefit of consumer credit is that it can provide individuals with flexibility in managing their finances. For example, credit cards can be used for emergencies or unexpected expenses, rather than having to take from a savings account, and personal loans can be used for debt consolidation or home improvements. This means that rather than saving up for weeks, months, or even years to make purchases in full, having consumer credit can allow you to bend your budget in a flexible, responsible way that will give you the “good stuff” now without hindering your finances.
Who Is Eligible For Consumer Credit?
Unlike business credit which ties eligibility strictly to business entities, consumer credit is available to any individual who meets the lender’s eligibility criteria. This criterion will vary from lender to lender, as well as the amount of the actual line of credit you are applying for. In general terms, lenders will look at your credit score and income, primarily, in order to determine a debt-to-income ratio that will evaluate your creditworthiness. The bigger the line of credit, the more in demand for a higher credit score and a lower debt-to-loan ratio.
What’s The Difference?
While both business credit and consumer credit enable borrowers to access funding, there are several differences between them, of which a few have already been mentioned. Of course, the most obvious difference is that business credit is tied to business entities and their creditworthiness, while consumer credit is tied to consumer entities and their creditworthiness. Business credit also tends to have a much larger line of credit than the average consumer credit, since a business requires thousands or even tens of thousands of dollars each month, just to operate.
Additionally, there are obviously different eligibility criteria required for both types of credit. Business credit requires a company to have a separate credit profile, which means that the business must be established and have a track record of paying its debts on time. Consumer credit, on the other hand, is available to anyone who meets the lender’s eligibility criteria, regardless of whether they have an established credit history. In most cases, you can get away with not having a credit history if you are a first-time applicant–the same privilege cannot be said for businesses.
At Jaeli Capital Consulting, we know every business and their reasons for seeking out funding are unique. We are dedicated to you, your time, and your business, which is why we provide only the best. If you require business credit, are in need of access to capital, need consultation or financial advice, or are looking to improve upon your business through comprehensive reports, content creation, or SEO optimization, consider looking at our available packages on our Home Page, or giving us a call.
Disclaimer: This blog is not intended for financial advice
Sources:
- Best, R. (2023, May 31). Business credit reports vs. Consumer Credit Reports. Investopedia. https://www.investopedia.com/articles/personal-finance/011216/business-vs-consumer-credit-reports.
- Haman, E. A. (2023, May 11). 10 advantages of having a business credit card. LegalZoom. https://www.legalzoom.com/articles/10-advantages-of-having-a-business-credit-card
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