As a small business owner, it is important to have an understanding of business credit terms. Similar to personal credit, business credit determines whether your company can be trusted by the way it manages money. Like personal credit, business credit is a reflection of how well your company manages money.
Why is business credit important?
The Nav American Dream Gap Survey, 2015 revealed of small business owners surveyed, 45% did not know they have a business credit score, 72% did not know where to find information on their business credit score and 82% didn’t know how to interpret their score.
The good news is that you don’t have to be a financial expert to negotiate the world of business credit. By knowing some key terms and definitions surrounding business credit, you can earn lenders’ trust and make your way to successful funding.
Here are the top ten business credit terms you should know:
1. Accounts Receivable – Also known as A/R, accounts receivable refers to the money owed to your business by others for products or services provided.
2. Business Credit Report – A business credit report is a detailed report of a company’s credit history prepared by a business credit reporting agency. The information contained in a business credit report provides crucial details needed to make informed credit decisions.
The data in a small business credit report is vital to getting the funding you need to successfully run and grow a business.
3. Business Credit Score – While a personal credit score is a number that represents an individuals credit history; a business credit score represents the credit risk of a business itself. Each business credit reporting agency has a different type of scoring model with scores ranging from 1-100.
4. Cash Flow – This is the cash that flows in and out of your business in a month. The cash coming into the business can come from customers & clients. Cash going out can be from expenses such as rent, payroll, taxes, etc.
5. Collateral – Any assets used to secure credit or a loan for the business is collateral and can be tangible or intangible. When you pledge an asset for collateral, it becomes subject to seizure by the lender if the business defaults on the terms.
6. Gross Profit – After deducting the costs it takes to make and sell your company’s products or services, the gross profit is the money that remains. The gross profit shows up on the company’s income statement.
7. Line of Credit – A line of credit for a business is an account opened with a bank, credit union or lender that lets you borrow money when needed, up to a preset borrowing limit. Each issuer has its own unique underwriting criteria, guidelines and terms.
8. Net Terms – This is a specific type of trade credit offered to businesses which require payment in full in a short period of time after a product or service is purchased. The typical net terms are net 30 and net 60 days.
9. Personal Guarantee - A personal guarantee is a written promise from a business owner to accept responsibility in the event the business fails to pay.
10. Profit & Loss Statement - The profit and loss statement (P&L), also known as the net income statement, shows if your company is making money, breaking even or operating at a loss.
Having access to business credit is the lifeline for a small business. It enables you to obtain the cash you need to grow, cover daily expenses, buy equipment & inventory, hire additional employees and so on. With a knowledge and application of business credit, you are well on your way to creating an important safety net for your business.