Managing business credit is a huge factor in running a successful company. Proper use of credit can fund your firm’s expansion. Poor credit decisions, conversely, can severely damage your business. Here are some tips on managing business credit.
Do you need credit?
Some companies are able to fund their own growth without borrowing. These firms consistently generate profit, and quickly convert those profits into cash collections. Profitable businesses end up collecting more cash than they need to operate. That extra cash can be used to fund business operations.
You can see that the need for credit is closely related to how quickly you collect cash. To determine if you need credit, put together a forecast of your cash inflow and outflows.
Forecasting cash
Consider how much cash you need to operate your business each week or month. Do you need a certain amount of inventory on hand to meet customer demand? How much is your payroll, and how often do your pay your employees?
Once you estimate your cash outflows, consider you cash collections. How much do your sell each week? If you extend credit to customers, how long does it take to collect your accounts receivable?
Finally, take a look at your average cash balance, and how that balance changes during the month. Can you see any sort of pattern? Maybe your lowest cash balance is always around the 10th day of each month. At that point, you’ve spent a lot of money to provide a product or service to that month’s customers. Your cash collections, however don’t start coming in until 20th of the month. Include this cash analysis in your forecast.
Ultimately, most firms cannot expand simply through their own cash inflows. To add a new product line or buy an expensive piece of equipment, you will probably need to borrow funds.
Separating business from personal credit
Once you determine that you need business credit, it’s critically important that you keep your business credit activity separated from your personal borrowing. As this article points out, some business owners make the mistake of applying for business credit using the individual social security number.
Applying as an individual creates several problems. First, by combining personal and business credit activity, you’re applying for far more credit (and borrowing far more money) than you normally would as an individual. Instead of building two separate credit histories, you’re making your personal credit picture worse. Increasing credit applications and loan balances on your personal credit worsens your individual credit score.
The solution is to take steps to establish a separate business, as explained here. Obtain an employee identification number (EIN) from the IRS (irs.gov). You’ll use the EIN for your business credit applications, and for business-related tax filings.
Speak with an accountant or any attorney about how your business should be structured. You might consider operating as a sole proprietor, or incorporating.
Once you have your EIN number and decide on your business structure, open a business bank account. Keep you business banking activity separate from your personal transactions.
Finally, apply for business credit exclusively through your new business entity. These steps will help you build a solid business credit history
Who can access your company’s credit?
Assume that Sturdy Outdoor makes hiking shorts and other apparel. Bob, the owner of Sturdy, secures a loan to manufacture and promote and new line of hiking pants. Part of the loan proceeds will be used to market and sell the new product. Bob needs to decide which employees has access to the funds borrowed for expansion.
This decision can create a risk of company theft. Anytime an employee has access to company funds, the risk of theft increases. In this case, the company sales force will be assigned new company credit cards to pay for travel, lodging and client entertainment. Bob believes that this spending is necessary to launch the new product.
The best way to prevent theft is to closely monitor company spending. For example, Bob requires a receipt each time the company credit card is used. The salesperson must also explain the purpose of each expense. Bob should also agree each credit card receipt to the card statement. That review should be completed soon after the credit card statement is received.
If Bob is diligent about monitoring spending, he will be able to manage his company’s borrowing. The new marketing efforts will lead to more sales, which will allow him to repay the company loan.
Monitoring your business credit rating
Once you establish business credit, you need to verify that the information reported to business credit bureaus is accurate. In some cases, a creditor will report inaccurate information regarding your business. If you need help resolving this issue, consider getting help from a credit repair company.
You can find creditrepair.com reviews and consumer reviews about other businesses that may help you fix credit problems. These steps can help you maintain a good business credit rating, which will give you access to borrowing power in the future.
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