If you have not paid much attention to business credit the time to do it is now. For small business owners, business credit is like a lifeline, an insurance against unexpected expenses that might come out of nowhere. Business credit gives you peace of mind with the knowledge that you will not have to scramble to borrow money on a short notice to meet emergency financial obligation.
Look no further than what Ford did before the great recession of 2009 hit the world. Ford had established a huge line of credit by mortgaging pretty much everything they had, including their namesake blue logo! When recession did arise and all the banks shut their doors to business loans Ford could borrow from the line of credit and continue investing for the future. When both, GM and Chrysler, filed for bankruptcy protection, Ford was not only able to avoid it, but position itself to take advantage of upturn.
Small businesses credit can take many different forms. You can apply for the bank loan at fixed interest rate. You can obtain business credit cards for regular day-to-day expenses. You can also establish a business line of credit to borrow in the future as need arises. Many times well-established suppliers also can provide line of credit to business owners. Amazon recently established a credit program by which small business owners who sell on their market place can borrow from them.
It is important understand what impacts the business credit scores and how to use the credit wisely. With that in mind below I have establish some basic do’s and don’ts of establishing and using business credit.
- Monitor your business credit score regularly – similar to personal credit score. In addition to standard personal credit rating agencies – Equifax, Experion and Transunion business credits are tracked and reported for millions of businesses by Dun and Bradstreet.
- Take actions that will boost your business credit score. The higher the credit score, the lower interest rate you will pay when borrowing money.
- Establish higher credit limit than what you would potential need. You never know when emergency will arise. Remember the Ford example I mentioned earlier.
- Pay attention to ROI when borrowing from business credit for business expense. Do not use business credit for the expenses that do not provide sufficient return on investment.
- Don’t mix your business credit with personal credit. Business credit should be strictly used for business expenses.
- Pay very high interest rate on business credit. There are number of avenues available to obtain business credit. It helps to shop around in search of lower interest rate.
- Spend the credit on frivolous expenses. Just because you have the money in the bank doesn’t mean you have to go on a spending spree. Save it for a rainy day.
- Take on more debt than you can handle. There is a difference between having a credit and borrowing against it. While you do want to establish more credit than necessary when borrowing you need to understand your ability to pay it back based on the cash flow.
What is your experience? How do you handle business credit?