Credit and Funding: What’s the Difference?

Updated: Aug 26, 2021

Starting your own business is hard if you are not financially prepared. Getting all the necessary expenses in every start-up is quite a challenge and corresponding funding and credit alternatives must be taken into consideration. Not all had the privilege to be born rich and financially stable. We start a business because of a practical reason: to earn money. And earning money also requires having the money to invest. In this blog, we will show you how Business Credit and Funding differs from one another and how they help us entrepreneurs operate our businesses without any worries.

What is Business Credit?

Every company has the financial capability to deal with its transactions. Business Credit is the ability of the business to purchase or procure any part of its operations and pay for it at a later date. This is basically the borrowing capacity of your company. The higher the credit rating, the higher your chance to borrow from lenders when you need it.

In order to have your credit rating work at a pace that it could go higher, you have to open commercial credit lines. This will make you a viable creditor as you have been involved in various credit transactions. This can strengthen your position as a creditor. You can open installment accounts, revolving accounts and vendor agreements.

What is Business Funding?

This term is quite general as it touches all activities a business is doing that involves financing a specific need, project or program. The term “financing” is oftentimes used as well because this is your company’s approach in acquiring capital from external sources.

Funding may involve, but not limited to, Government Grants, Loans, Investors, and Self-organized Funding Programs. These activities involve external sources which can be later on partners for your business to expand its network. A very worthwhile funding activity is something that we could benefit a lot from. The impact of the funded program or project should suffice or return a higher gain for the company.

What is the difference between the two?

Both items can be represented by loans (business funding) and line of credit (business credit). Loans are usually borrowed on a lump sum while the line of credit has a borrowing limit and are usually being done on a repetitive basis. In terms of purpose, loans are normally being borrowed for a specific purpose, while a line of credit is free-flowing and has no specific purpose. All borrowed items have additional expenses in the form of interests. For loans, there’s an interest rate accrued right away after the borrowing transaction. For line of credit, interests are only incurred once funds are accessed. There are annual fees but some banks waive it as part of their marketing strategies.

Both concepts would help businesses deal with risks and future expansion or procurement projects. What all entrepreneurs need to take note of is that in every decision, we must have a plan. If you decide to get a loan or a line of credit, be sure that you have forecasted your business’ capacity to pay for it when the due date comes.