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By Richard Flynn, SVP and GM for American Express Open
In good and bad times, credit is what helps keep a business steady. It provides financing for new growth or temporary relief in a cash-flow crunch. Here are the best ways to manage the health of your
business’s credit.
Know Your Credit Worthiness
Lenders consider a number of sources to judge your business’s creditworthiness, and they will look even more closely now. A strong history with a specific lender is a great start, but lenders also go beyond their own records to assess your credit history, turning to personal credit and commercial credit bureaus.
Put Your Best Boot Forward
Make sure your business is registered with the major reporting agencies, such as Dun & Bradstreet, Experian, and Equifax. The more information there is about your company, the easier it is for lenders to confirm that you are an established business. When registering with reporting agencies, be aware that most offer a variety of services to small businesses. These include some that are free and others that are available for a fee, so carefully research which options are best for you.
Review your company’s profile and credit report often to address and correct any inaccuracies. For example, is the Service Industry Classification (SIC) accurate? If not, your company could be seen as part of another industry entirely. If you’re unsure which SIC code applies to your business, visit http://www.osha.gov/oshstats/sicser.html for the code that best describes what your company does. Also review the entire payment history in your credit report carefully, checking any Uniform Commercial Code (UCC) filings to confirm information about leases or liens that apply to your business.
Apply for Credit while Your Credt is Good
If you wait until you actually need it, your credit record may already be less attractive to lenders. Furthermore, securing credit with terms you’re comfortable with takes time—a luxury you may not have later.
Know How Much Credit to Apply For
Applying for too little can leave you strapped for cash, but applying for too much credit—or too often—can adversely affect your credit score. It’s important, for example, to have enough short-term credit to cover short-term expenses, such as basic supplies. But if you have too much, you may be turned down for vital long-term credit when you need to finance necessities, such as the remodeling of your retail space.
You can determine the right balance for your business with a C.P.A. or other trusted financial advisor. But in preparation, make sure you have a good understanding of what your current expenses are and what your future expenses may be. In addition, take time to question whether your expenses are really as low as they could be. Recurring expenses are a particularly great place to cut back. Speak to long-term vendors and find out whether you can renegotiate a deal. If you’ve been a solid, long-term customer, a slow economy may offer room to negotiate.
Evaluate Your Efficiency
Many businesses become set in their ways, but lean times are a great opportunity to streamline. As you’ve grown, perhaps you’ve outgrown how you purchase supplies. There may, for example, be a way to gain a discount by making fewer but larger orders.
Protect the Credit You’ve Earned
If your company has good credit as well as an appropriate amount of credit on hand, you’re in great shape, but you’ll have to work to maintain your good standing. One of the easiest ways to maintain good credit is simply to pay on time. As easy as that sounds, however, routine tasks like paying the bills can sometimes be overlooked in small businesses since owners and employees generally wear several hats.
To avoid this problem, set up a fixed procedure for reviewing and paying the bills each month and appoint one or more people to carry it out. You should also take advantage of any tools that lenders offer to make timely payment easier. Some offer the option of setting up automatic payments each month, as well as account alerts by email or text message to keep you informed. Many lenders also offer the convenience of paying online or by phone, which allows you to hold onto cash as long as possible while still paying on time.
Do You Have the Cash to Pay
Your Bills?
Take a close look at cash flow management. Proper cash flow will give you the means to pay the bills and help you avoid overusing or misusing credit. To keep cash flowing, look for ways to make your invoicing more efficient. Familiarize yourself with the customer’s invoice protocol and learn who manages payments. It will reduce delays and help keep you informed about when you can expect payment. Another way to improve cash flow is to bill electronically and receive payments by electronic funds transfer. You may also want to consider accepting credit cards for payment if you don’t already do so, because it can limit your exposure to late payments and provide cash quickly.
How to Use Credit
Use long-term credit for long-term investments, and short-term credit such as credit cards and credit lines for short-term expenses. And above all, don’t use it when you don’t really need it. If debt evens out cash flow or contributes directly to revenue, then it’s probably worth considering.
When using credit and charge cards, consider making purchases with business cards that offer rewards, such as air miles, cash back and rewards points that can be redeemed for a variety of retail and travel benefits. Also, use charge cards when you can pay off purchases in full by the end of the month.
Every penny counts in challenging times, so be sure to pay off bills when funds allow. These payments will reflect positively on your credit profile.
One good thing about tough times is that they don’t last. And the better you manage your business now, the better your ability to respond to positive changes when the economy eventually rebounds.
Get more tips on managing credit and building a resilient business, by logging on to OPENForum at openforum.com.
About the Author: Richard Flynn is the senior vice president and general manager for American Express Open