Understanding Credit Terminology

 

Oftentimes, when asked what types of credit they already have, business owners will say they don't have any credit, or that they have some tradelines or a few basic credit cards. In reality, they may be further along in the credit-building process than they even realize.

 

Below is a basic breakdown to help you better understand the different types of credit:

VENDOR credit is defined as Net accounts with suppliers who provide products or services to any industry but not to any specific industry, such as office supplies, signs, computers, fuel, paper, software, forms, tools, etc. These are the things that most business owners will need in day-to-day operations.

 

TRADE credit is generally Net, Open, Lease, or Set term accounts, established to purchase products or services specific to your industry, such as selling tires to a tire store, food to a restaurant, pipes to a plumber, or flowers to a florist.  If the florist buys tires, for instance, it would be classified as Vendor credit instead of Trade credit.

 

RETAIL credit generally refers to larger national companies who sell to private consumers as well as commercial customers and offer a variety of account types and repayment terms.  A few examples would include: Home Depot, Office Depot, Sears, or Dell. How these transactions get reported to the bureaus will depend on multiple factors, such as whether they are based solely on the business credit or are personally guaranteed, and whether they are Net or Revolving accounts.

 

FINANCING generally describes accounts created for the purpose of making a monthly payment for a high dollar product or service, such as leasing a photocopier or vehicle, or paying on an expensive contracted service.

 

FUNDING relates to "projects" rather than "products". For instance, you may be looking for funding to build a new warehouse, expand to global markets, or start a new division of an existing business.  Funding generally involves contractual agreements setting a specific date or percentage of proceeds to finalize the settlement.

 

WORKING CAPITAL is funds made available to you by a lender on Set terms. These terms will vary depending on what portion of the capital is available or in use, and what specific repayment has been established.  A good example of a working capital would be a loan made to the business through their merchant account, and the provider will hold 10% of all new transactions until the debt is repaid.  It can be paid off in regular payments or in advance, but it must be repaid in full by a set date.

 

FACTORING is somewhat related to working capital in that the lender allows you to "factor" your open invoices against a debt.  The lender lends you funds against the invoices and, therefore, owns the proceeds of those invoices when they are paid.  If you have a contract that will pay you $10,000 per month, you can factor those invoices to get your funds for the contract now, and the payment for the invoice will go directly to the lender to repay your debt.

 

LINE OF CREDIT is a note generally issued by a bank or other funding source allowing access to funds up to a specified amount.  The business only uses what funds they need from time to time, and only makes repayment and pays interest on the percentage of funds they have in use at any given time. Example: a landscaper needs more plants and supplies in the spring and less in the winter.  If the bank allows a line of credit for $100,000, the landscaper can use $10,000 now, paying only the interest and payment on that amount. But if, in the spring, the landscaper needs to use $50,000 to restock with new plants, the funds are already available without having to re-apply for another loan.  At that point, he would start paying on the balance he has out at that time.

 

LOAN refers specifically to borrowed funds paid out in full and repaid in the specific terms outlined in the agreement, such as a real estate loan, bridge loan, or construction loan.  These are generally collateral-based agreements requiring complex contracts and higher guarantees, but generally will have lower interest rates because they are based upon a company's proven history or the demand in the market.  A good example would be a local motorcycle shop who has shown increasing growth in their sales and bank balances over time.  When they want a loan to add on to their existing building, the bank will be able to see their history and know it is a good investment with low risk.

 

OTHER TERMS TO REMEMBER

 

COD ~ Cash-on-delivery or paid at point of sale

PREPAID ~ Paid before services are rendered

ACH ~ Autodrafts from bank account / credit card

NET ~ To be paid within specific days allowed

SET ~ Paid when collected from third party

LEASE ~ Paid on specific day of each month

OPEN ~ Special terms between both parties

REVOLVING ~ Carry a balance over a period of time

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  • Establish new trade lines for your business

  • Advise you against potentially risky behavior

  • Provide companies who can report payment history to the business credit bureaus

  • Register your business with SAM.gov

  • Provide you with guidelines and the training you'll need to keep making progress

  • Refer you to trustworthy lending sources for working capital and business lines of credit

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Starpoint Credit Solutions LLC is not affiliated with Dun & Bradstreet®, however we recommend their products to our clients to assist in the creditbuilding and monitoring process.
Starpoint Credit Solutions LLC
11504 Joy Street   |   Austin, TX 78748
Phone / Fax  (800) 918-7505
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