Let’s talk Business:Four Rules for Business Credit
There are two sides to business credit, just like almost everything else in life. It can be good for your startup business, or it can be totally destructive to whatever little chances you have to grow your business if you misuse it.
But even before you have the chance to use it, you need to acquire it first. Obtaining credit can be as difficult as climbing a mountain.
But while the financial world has changed dramatically, the rules for credit are really not all that new.
More importantly, credit can still be a powerful tool for small-business owners, when managed wisely.
Here are four rules to follow:
1. Keep Things Professional
One of the most common mistakes people make when starting a business is mixing their business credit with their personal credit.
A personal loan should not be used for your business. While it can make getting started easier, your personal assets may be at risk if vendors pay late, contracts are put on hold or orders are cancelled.
Credit for business carries different risks, and should not be mixed with personal credit.
2. Use Debt to Build Your Business
If your clients are not paying you, that should not mean the death of your business. The money others owe you can also be an asset rather than a frustration.
If clients have fallen behind, and business is bad, you can often borrow against accounts receivables to reduce cash flow problems.
3. Create a personal relationship with your bank.
Some time back, every business owner had a close relationship with his or her local banker, and benefited from the trust this cultivated.
The banker knew your name, your kids and your role in the community. Things have changed now. When you approach a bank for a loan, they don’t consider only “trust” but a whole lot of other things.
But by being clear with your banker, it can help you when you might not ordinarily qualify for a loan. Additionally, your banker is almost always certain to have a powerful network of connections.
Solidifying a relationship with your banker can be a valuable asset to you and your business.
4. Think of the Long Run
One of the problems leading up to the financial crisis is the emphasis on quick money, especially for small businesses. But credit institutions don’t work like that.
They need to see continuity, and while your business plan shows that it is profitable in the short run, what happens in the long run?
This long-run scenario is what gets the banks interested, since most of their business loans are actually long term loans. Small businesses are expected to display a sound plan for the long-term and justification for loans, ideally proving themselves to potential investors as a good risk.