When should you start building a safety net for your business? As with all other safety nets, well before you need it.
Any smart businessman or woman will tell you that challenging times can spring up on you without much notice. Some of them you might anticipate but others might come out of the blue. Making sure you’re prepared to tackle them one by one is the first rule of running a successful business.
But where should you even start and what are the roadblocks you might encounter along the way?
This article will help you understand everything there is to know about building a business credit safety net as effectively as possible.
Who Should Start a Business Credit Safety Net and Safety Net?
If you’ve just started a small business you may be compelled to focus in other areas of your business before focusing on a safety net. But experts say that small businesses should be extra careful as big corporations often have more means to avoid huge monetary problems. They may also have very detailed budgeting processes that may help with alleviating certain stressors, something that smaller businesses are still trying to establish.
So if you’re at the beginning of the journey, now’s the time to think about how to protect yourself and your company. No business owner should think that the worst can’t happen to them. Equipment might break, a client may be late with a payment, there are growing A/R balances you should keep in mind as well as increased inventory needs. Any of these things can put you at serious risk, hoping that they won’t happen will not do you any good in the long run.
A key factor you must keep in mind is that you should consider your business safety net like your personal one. Just as you would set up savings for a rainy day, you should consider protecting your business from all possible angles.
An issue that a lot of people have is that this is just another layer of ‘stress’ when setting up their businesses. Many people believe they could leave this to the last possible moment while focusing on other money-making aspects. However, all those efforts will go right down the drain if you bump into any troubles. You might be forced to go back to square one or be forced to give up on your dreams entirely.
Is that the type of risk you want to take?
How to Build Business Credit
If the worse comes to worst, your business credit will help you secure a loan, your terms and interest rate. As it is based on a measurement system from 1 to 100, you should aim to score a 75 or higher. A lot of business professionals are unaware of these requirements, so don’t focus on what anyone else is doing on the other side of the pond and work on building yours up.
The sooner you start the process the faster you can reach an ideal score- and even surpass it. On top of registering with a credit reporting agency, choosing the right corporate structure, and maintaining a viable corporate address and phone number, here are 7 steps that should further help you build your credit.
1. Start Building Business Credit Early
Much as with any other monetary issues, especially in your personal life, it’s never too late to start building up credit. If you haven’t begun the process already then don’t postpone it, not even for another day. You never know what awaits around the corner and trust us, you don’t want to find out without a safety net at the ready.
Ideally, you should start the process while you’re writing up your business plan. It’s best to consider that the two to go hand in hand. Up and coming business owners should not even think of setting up shop without already having a solid idea on how to build their credit.
2. Establish Good Personal Credit
Sadly, when most people find success through their businesses, they have the bad habit of paying themselves in order to splurge on big-ticket items that were previously unavailable to them.
Keep in mind that ending partners will check your finances across the board. Your business might look strong and profitable but more often than not, global analyses uncover personal debts or other issues that signal a not so healthy relationship with money.
As such, you may be starting off on the wrong foot. It’s important to live within your means and show banks that you’re not too eager to pay yourself first. Favorable company equity will pin a golden star on you.
3. Create a Relationship With Your Bank
Ideally, you want your bank to know that you’ve got a good head on your shoulders. When considering your finances they’ll look at both your personal and business accounts, including NSF activity, account balances, and overdrafts.
This should be a given, but you must also form a more personal relationship with the bank representatives. A good idea is to discuss different scenarios with them. For example, give them precise examples behind needing to draw on your line of credit. What would cause you to take this step? How could you mitigate further damages? How will you ensure the same issues won’t spring up again?
4. Produce Trustworthy Financial Reports
On the note of open communications, you must offer your bank financial reports frequently. Up to date reports on your performance are crucial, so you might want to invest in financial software to help you create quality interim reports. Furthermore, consider getting an audited financial statement from a certified public accountant.
Meanwhile, you must be open to the possibility of offering your personal tax returns up for review. All these put together will offer banks a better understanding of your financial prowess. Trustworthy financial reports will help strengthen the relationship you have with your bank.
5. Make Payments on Time or Early
Early payments will provide further incentive for a bank to trust you, so don’t underestimate what this simple step could do for the longevity of your line of credit. Start small as it will be easier to make payments that way and keep in mind that you can still increase your credit card limit or the size of your loan in time.
Another thing to keep in mind is that banks typically manage different accounts, some that you may not have been aware of. Store credit cards, such as ones for Home Depot or Staples may be included, so ensure that you’re always paying those on time too. If those don’t look good, it’ll shine a very unfavorable light on you.
All in all, try to make payments 10 days before the due date as often as possible.
6. Use Business Credit Appropriately
Being ahead of the game and using your credit appropriately can ensure that your business won’t suffer. That’s why we need to circle back to communication. Just as you are to be open to your bank about your finances, your bank should provide adequate support in regards to a loan.
Let’s say that a piece of equipment breaks. It is better to ensure that you’ve got it covered ahead of time instead of scrambling to fix the issue right after whatever incident damaged it. Banks can provide guidance lines of credit specifically for equipment purchases and if the guidance line of credit is preapproved with certain terms, the credit may be approved at the annual renewal of your working capital line of credit.
As such, if worse comes to worst, the ball will already be rolling.
7. Monitor Your Business Credit
You must protect your business credit against fraudulent activity as much as you protect your personal credit. Putting up safeguards for this purpose will ensure the safety of your credit.
You may find credit tracking tools that allow you to monitor your financial risk for free. But even if you don’t, paying for these services is a must and be seen as an investment. It’ll prove that you’re willing to go all the way for the benefit of your business.
Understanding Trade Credit
A good relationship with your vendor is also a must. That being said you have to always get everything in writing. If and when discrepancies arise, you want to provide your bank with the necessary information to ensure that your credit score won’t get red-flagged.
A plethora of problems may spring on you out of the blue. Perhaps your vendor is outsourcing and automating their reporting, which could lead to your account being reported as late. They could tell you your invoice is net 60 yet they may fail to communicate this exception to the accounting team. The list goes on- and it’s understandable as they are not specialized in banking or credit.
That’s why it’s your job to stay on top of things and always ensure that you have all the data from either side so that no matter what, your bank won’t have any reason to look at your finances and reports with a raised eyebrow.
Want to elongate your business’ cash cycle? Then consider purchasing cards in order to bolster your credit safety.
Owners and employees alike can use these to make purchases from approved vendors. They can even be tailored to an individual’s specific wants and needs. Remember, users won’t be charged interest either, so that’s another nifty reason to consider this step.
The best part about them is that they offer a great amount of control when it comes to the types of expenses that go on these cards. Travel and entertainment? Sure, why not?
Understanding Your Business Profile
Your business file is a document containing your business’ mission statement, financials, and ability to generate revenue. It is, therefore, a great tool for potential investors or clients on top of assessments of your credit history and vendor relationships.
This is your opportunity to prove your stability, reliability, and transparency. It is better to stay consistent when using this document, whether it is for a marketing plan or a credit application. As such it should contain business vitals, banking information, address, etc, while also keeping it concise and to the point.
Furthermore, you want to ensure that your online presence is favorable. Nowadays, potential financial partners won’t hesitate to check out your internet footprint, especially when it comes to negative feedback.
Create a Credit Policy for Clients
You can protect your business’ cash, your biggest asset, by opening a credit plan for customers. If you’ve already been thinking about opening up this possibility for your business then it’s best to set this up as early as possible. That way, all the groundwork will be ready for when you wish to actually implement the plan.
Only after the plan is in place can you begin extending credit to customers. You should check your customer’s credit history, offer discounts, charge a late fee and interest and always keep an open eye on those accounts who have started to become past due. These are only the most basic of practices, but make sure you’re catering a credit policy that makes sense with your business and clients.
All in all, when it comes to business credit you should always bank on strong relationships with potential financial partners, keep a line of communication open at all times and deal with it similarly to your personal credit- with care and consideration for the future.