Small business financial advisors will tell you that credit can be the lifeblood of small businesses. By the same token, bad decisions related to business credit and financing can be your company's undoing, and possibly the undoing of your personal and family finances as well.
Your small business bookkeeping and finances should be kept separate from your personal and household finances so that your home and other personal assets are not put at risk in the event of a business failure. Putting up a personal guarantee as backing for a business loan shouldn't become necessary if you plan ahead to methodically build your company's credit.
Even a company that's been fortunate enough to operate successfully without taking on debt might still have a need for credit in the future, and that need may come urgently and at an unexpected time. Building a good credit rating and having credit is available, even if it's not immediately needed, is wise. In such a situation, having reasonably quick access to business credit could make the difference between surviving a rough patch and financial failure from inadequate cash flow. Your business records should be well organized and well maintained in order to make obtaining credit as smooth and efficient a process as possible.
A small business without an established credit history can begin building a credit rating several ways:
- Start non-revolving credit accounts with willing vendors and suppliers. Always pay these accounts within the terms specified.
- Bank with a financial institution that is willing to make small, unsecured loans to its business customers.
- Take out such a loan for an essential purchase such as a piece of equipment. Again, be sure to make all loan payments on time, if not early.
- Lease equipment, and make timely payments to the leasing company
- Take out an line of credit against your outstanding receivables
As you begin to build business credit, make sure that you monitor your company's credit score and check your credit reports for inaccuracies. If you find any mistakes, act aggressively to get the credit bureau to correct them. Thoroughly research possible sources or credit and only pursue the ones that fit your business's needs. Multiple credit applications can result in multiple credit inquiries that can reflect poorly on your credit score.
Business credit, once obtained, should always be used as wisely and strategically as possible. Again, repaying loans and lines of credit on time is crucial to maintaining an excellent credit rating. Using credit helps build your rating, but overburdening an enterprise with business debt is as inadvisable as a family getting in over its head with household debt. Use business credit cards regularly but prudently, and don't max them out – one rule of thumb is to keep card balances at 30% or less of available credit.
At PADGETT BUSINESS SERVICES®, we're committed to helping our small business clients prosper and grow. We provide financial reporting, payroll and tax services for small businesses all across the United States and Canada, and we also offer expert small business consulting services to help entrepreneurs chart a course for the future. Padgett has been partnering with small business owners since 1966.
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