Is Your Business Taking Advantage of These Types of Credit?

Credit has always been one of the most valuable tools in business. It can be the lifeline to reach more customers, boost production, access new facilities, take advantage of new opportunities, or keep your business afloat in times of low cash flow.

Yet, over-reliance can lead to financial strain. Understanding the credit your business uses can help you maintain a balance and use credit strategically to grow your business.

Types of Credit

You will come across three basic types of credit during your business life cycle. Understand them so you know when to use them and stay away.

Revolving Credit

Revolving credit renews automatically once you pay off some of the debt.

Sounds familiar?

It should because things like credit cards and lines of credit that provide flexibility for day-to-day expenses and short-term needs fall under this type of credit.

These types of credit usually come with a higher interest rate since they move quickly and give you easy access to a pre-determined figure. You need to be careful with these types of credit because if you fall into the cycle of falling behind on payment, you can end up paying large amounts of interest.

Remember to manage this type of credit carefully.

Term Loans

Term loans have fixed repayment schedules and fixed or flexible interest rates.

They are fixed sums of money received with terms defined by the lender and accepted by the borrower.

You will likely use term loans for more significant investments, such as equipment purchases or expansions.

Term Loans usually have longer life spans and lower interest rates than revolving credit.

As mentioned, they are great for grander projects, but you must pay attention to the interest terms and conditions you accept. These can be high risk because of the many changes a business can experience throughout the loan.

Trade Credit

Trade credit involves obtaining goods or services on credit from suppliers with an agreement to pay at a future date.

Managing trade credit effectively can enhance your working capital and help you manage your cash flow better.

Read our post on cash flow to understand better how this is the case.

Trade credit is an excellent way to build better connections with other businesses supporting or working with your industry.

Yet, you must be careful not to depend on suppliers who may need help to provide products or services consistently.

The Challenge:

Try to spend some time this week figuring out which of these types of credit could help your business take advantage of new opportunities as they arise. How can you gain access to them?