Business Credit and its Legalities
by Attorney Shakeatha Davis
Working capital is the backbone of any business. However, in times when cash flow is low or unsteady, taking a business credit can ensure that the business has access to a steady flow of working capital. Business credit is usually utilized to meet regular or unexpected short-term expenditures, enhance cash flow, or make new business investments.
A “business credit” or a “line of credit” is a set amount of credit available to a business owner which can be used by the business owner as and when they need it until the credit limit is reached. Business credit is similar to having a credit card. However, business credit is less expensive than credit cards, as business credit interest rates are often substantially lower than credit card interest rates. Since business credit is less expensive than credit cards, it is an excellent choice for short-term financing for a business.
The Legality of Business Credit
Unlike consumer credit, business credit does not have many safeguards under law. Business credit is indirectly recognized under the law by the Equal Credit Opportunity Act.
Equal Credit Opportunity Act: In case a business owner has a business with annual revenue of fewer than one million dollars, and their business credit application is rejected, then the creditor is obliged under the Equal Credit Opportunity Act to disclose that they have a right to know the reason for their credit application was rejected and provide an oral or written statement of action.
Small Business Fraud Protection Act (Bill): In November 2019, this bill was introduced, proposing to extend consumer protection currently given to consumer credit to business credit of small businesses too. However, this bill has not become a law yet.
How Can Business Owners Protect Themselves While Getting a Line of Credit?
Business owners can protect themselves and their interests while getting a line of credit by ensuring that they take the following steps:
A Separate Legal Entity Must Be Created: Even if the business owner is a sole proprietor, the business owner should create a separate entity for their business by having a separate business bank account or by incorporating a Limited Liability Company (LLC) or a company. This is so that bad personal finance habits of the past don’t negatively impact the financial profile of the business, which shall determine business credit application approval.
Regularly Check Business Credit Profile: After getting business credit, business owners should monitor their business credit profile to make sure their timely payments are being registered and should report any errors that could harm their business’ credit score so that they can be fixed.
Work on Getting Increased Credit Limits: Business owners should continually strive to increase their available credit. A business owner’s ability to take on more risk increases over time as their credit line grows. By paying back credit and interest regularly and by negotiating a higher credit limit on a regular basis, business owners can get access to a larger working capital which can be used to increase the business’ profitability.
Business credit can help a business grow and fund other profitable investments. However, given the limited legal protections for business credits, business owners should read the terms of the business credit document carefully, maintain a separate legal entity for their business, regularly monitor their business credit profile for errors and negotiate for a higher credit limit regularly.
To ensure you remain on top of your credit and credit options, be sure to visit the S. Davis Law Group website HERE. We can help you along the way.
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