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Understanding The Differences Between Personal And Business Credit

Aug 17, 2007
Credit is a common way out for people in financially difficult situations. These financially difficult situations can be either business related or personal. Financial institutions have designed programs to bail out the customers from financial ruts. The credit terms for business and personal matters are completely different. Financial institutions also provide business credit through credit cards for the SMEs (small & medium sized enterprises). This can be considered a business loan for either starting or maintaining a decent momentum for a business. Personal credit through credit cards is used to pay off personal liabilities, manage funds, or buy essential things with an eye to paying it off in a timely manner.

Differences between Business & Personal Credit:

1 Liability in the case of any default for business credit lies with the company or the enterprise. With personal credit, in the case of a default, the individual is liable to fulfill the amount owed to the lender.

2 Personal belongings can be taken as compensation if a person fails to fulfill the contractual commitment of the lender in due time. In the case of business credit the belongings of the enterprise can be taken if the company doesn't pay its credit on time.

3 In the case of companies there is a stock pledge that can be served to pay off the credit to the lenders in case the enterprise fails to repay the amount on time. The lenders take ownership of the said stock and can sell or auction it to retrieve their amount. But in the case of personal credit such a situation is rare. Only in case of home loans or larger amounts can the lender ask for a surety on property.

4 There is more potential risk involved in business credit. In the case of business credit the repayment is more often than not based on the clients' ability to sell a product or service. If the payment is delayed the installment also gets delayed resulting in either default or heavy interest. People unable to pay personal loans or credit amounts usually have it siphoned from their income.

5 Business credit usually runs for long periods and has an entirely different set of rules for payment. The arrangement is either contractual or otherwise legally bound with a clause dedicated to an exit policy. Personal credit is often based on mutual trust among the parties, or, if legally bound, it is for a small duration of time.

Advice About Using Credit
Those using business credit should regularly monitor their credit reports and never attach their personal assets to that of the enterprise in order to secure a line of credit or a loan. Credit whether it is business or personal is a great facilitator for solving financial worries but be careful with the terms and the repayments.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes afree weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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