Three tips: Well-managed credit is your key to business resilience
Richard Flynn, American Express OPEN -- Manufacturing Business Technology, 2/9/2009 8:21:00 PM
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Challenging times bring out the best and worst in a business. While the downturn has caused no small amount of concern for many manufacturers, it also is prompting businesses to buckle down and find new ways to do more with less. With this necessity comes greater efficiency, making lean times an incubator that will eventually hatch new strategies and winning ideas.
But even your best innovations won’t have a chance if your business doesn’t have the fundamental resilience to endure the downturn. In a lagging economy, small businesses are sometimes knocked off their feet because they lack the solid foundation of good credit. In any economic climate, credit is part of what helps keep a business steady. It provides financing for new growth initiatives or temporary relief during a cash-flow crunch. To ensure you’re on solid ground in these times, learn to properly manage your credit with these three basic tips.
1) Put your best foot forward
Lenders look at a number of sources to judge your business’s creditworthiness, and they will look even more closely in the current economic climate. If you’ve established a strong history with a specific lender, that’s a great start, but lenders also will look beyond their own records to assess your credit history—turning to personal credit and commercial credit bureau reports.
Put your best foot forward by ensuring your business is registered with the major reporting agencies, such as Dun & Bradstreet, Experian, and Equifax. The more sources of information there are about your company, the easier it is for lenders to confirm that you are an established business.
You’ll also need to review your company’s profile and credit report often so you can address and correct any inaccuracies. For example, is the Service Industry Code (SIC) accurate? If not, your company could be seen as part of another industry entirely. Also, review your entire payment history carefully, and check any Uniform Commercial Code (UCC) filings to confirm information about any applicable leases or liens.
Though not technically part of your credit history, it is important to keep any applicable licenses for your business current. Otherwise, lenders may assume your business is poorly run or failing. They also may suspect the worst if you’re not properly insured or bonded.
2) Strike the right balance
Once you’re prepared to make the best impression possible, apply immediately for any credit you anticipate needing. 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.
A far greater challenge than figuring out when to seek credit is knowing 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. But if you have too much, you may be turned down for vital long-term credit when you need to finance a new inventory system, for example.
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.
While reviewing what you currently spend, take time to question whether your expenses are really as low as they could be. What you’ve come to consider essential may not be. Monthly 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.
Also evaluate your business’s 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 raw materials or supplies. There may, for example, be a way to gain a discount by making fewer—but larger—orders.
3) Protect what 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 also should 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.
To ensure you’ll 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. Understanding every customer’s invoice protocol and who manages payments will reduce delays and help keep you informed about when you can expect payment. Another possibility to streamline invoicing and payment is to bill electronically and receive payments by electronic funds transfer. In addition, you may 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.
Regardless of how carefully you manage cash, you will at some point need credit. The key is to make sure you use it wisely. 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, it’s probably worth considering.
When using credit and charge cards, consider making purchases with business cards that provide 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.
While a downturn can spur innovation and bring about new efficiency, perhaps the most reassuring truth about tough times is that they don’t last. Make the best of the current situation and be ready with a resilient business that will soar when the economy rebounds.
About the author:
Richard Flynn is senior vice president and general manager for American Express OPEN, the nation's leading issuer of card products for small business owners.
For more tips on managing credit and building a resilient business, log on to OPENForum here. OPENForum was created by American Express OPEN for manufacturers and other small businesses seeking community building opportunities, specialized small business content, and advice from business leaders.
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