The topic of this article is to explain why your business must build business credit, no matter what size.
Businesses are always looking for ways to save money and maximize their profits. The one thing most businesses can’t afford though, is poor credit.
Your company’s financial health matters. Not just to you but to all the various stakeholders including clients, employees, partners, suppliers and others that rely on you succeeding in order to succeed themselves.
External factors that cannot be controlled directly often result in less than ideal circumstances with no or minimal warning time impacting positive cash flow or profitability leading to unnecessary stress and loss of opportunities like sales not closing or account receivables drying up.
An unexpected increase in expenses due to an accident or injury caused by poor road conditions, for example, can devastate your company’s liquidity if you don’t have enough cash reserves or lines of credit available.
Lenders look at your company’s financial performance and rely on this information to determine how much money to loan you. If they see that your accounts receivables are low, it could mean that clients aren’t paying their bills on time which means the loans remain unsecured with them as a creditor not being paid first in the event of a bankruptcy.
As more of these red flags pile up creditors will become concerned about whether they’ll recoup what is owed to them from selling off assets from a forced liquidation. This decreases credit lines and increases interest rates making it even more difficult to access cash when needed.
This is why it’s important for any type of business, regardless of its size, to build business credit so your company is eligible for commercial loans allowing you to borrow funds at commercial rates instead of consumer rates which are much higher.
A short term infusion of capital can be invaluable if it allows you to avoid having to take out a loan or go through the hassle and expense required by an unsecured bank loan.
At the same time they also allow you increase lines of credit with existing creditors in order to help finance accounts receivables that may not have been collected on time. This will prevent frustrating missed opportunities for new sales not closing because there was no working capital available.
Let’s consider a business that small and has the bad luck of an accident causing $5000 in damage to their vehicle. They receive a settlement but don’t have the cash immediately available to pay for repairs because it happened unexpectedly. What they’d usually do is take out a loan from their bank charging the full 19% APR. This will add almost an additional $1000 to the final amount paid since they’ve been charged interest on top of what was already owed when the accident took place. This company could have easily used credit lines or factoring services from finance companies to avoid paying exorbitant interest rates because this type of expense doesn’t help grow their business, in fact it hurts because now not only it impact their liquidity but also their profitability.
It is with this in mind that the time to build business credit is now, not tomorrow. By putting policies and procedures in place today, you’ll be better able to mitigate unforeseen risks while building long term financial stability.
Research shows that companies involved in trade show or exhibits are more likely to win new accounts because of their presence at networking events. The problem though, is every trade show requires an upfront fee according to budget availability making it impossible for many small businesses to participate even if they can afford it because there’s no funding available for this purpose. While you may usually pay with a credit card up front or during the event itself if something goes wrong your liabilities would far outweigh any possible profits made from potential new business opportunities. This is why it’s important to build commercial credit so that you can acquire flexibly financing for this purpose.
Take the time to learn how your company is rated by creditors and if there are any red flags being flagged before they have an opportunity to cause serious damage. You’ll be surprised at what you discover which may help ensure your business success.
· Your receivables are low, which means clients aren’t paying their bills on time.
· Accounts payable are high, making it difficult to cover costs of goods sold in order to keep operating expenses low.
If need be, you can even work with trade service providers offering factoring services instead of waiting until after the event takes place to see where you stand, allowing you to take advantage of opportunities when they arise so you can grow your business.
It’s estimated that 25% of new businesses fail within the first 5 years because insufficient financing is available or there’s too much pressure on a primary line of credit which forces them to close their doors before realizing the level of success they were hoping for. Loans from friends and family may often lead to embarrassing defaults if not repaid in full once promised, putting a strain on personal relationships.
Unsecured loans from banks mean higher interest rates and piles of paperwork making these options impractical and cumbersome not to mention draining your time and resources already spent developing your product or service.