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Business credit gets developed over time through planning and implementation of smart tactics. In these tough economic times, managing your business credit has increased in importance.
Recently, I received a note from a reader in Las Vegas. A respected business leader, he has owned a small construction company for 27 years. When the mortgage meltdown brought real estate development to a screeching halt, two large national builders exercised a cancellation clause in their contracts with him. He was left holding $12 million in loans to major banks for half finished neighborhoods. Drawing down his company’s savings, he paid the interest on the debt for more than a year with hope that the market would rebound and his company could recover. After exhausting reserves, he had one option: declare bankruptcy. All of this is made more tragic because his company is not incorporated and he guaranteed loans with personal assets. Now his family’s credit is being destroyed along with his company’s. This successful businessman, who carefully built his creditworthiness, made some critical errors you want to avoid.
1. Separate personal and business credit.
To grow business credit, it is absolutely essential for you to clearly separate your business credit from your personal credit. The rules of business credit are dramatically different from the rules of personal credit. See You Can Build Awesome Business Credit. When you use more than 50 percent of the limit on any personal account, your personal credit ratings decline. However, you can max out business accounts with no negative repercussions to your business credit ratings. Normal business credit usage will cause your personal credit scores to drop dramatically if they’re combined.
2. Pay attention to the credit terms of each business account.
When terms are Net 10 or Net 30 or Net 60, it means your balance is due in full by 10, 30, or 60 days after the date on your invoice. Pay by that date to receive a Paydex score of 80 from Dun & Bradstreet (D&B). Unlike personal credit, you can earn “bonus points” for paying business accounts early. Pay before an invoice is cut to receive a perfect 100. Scoring details are available on the D&B Paydex Value Table. Please note: Scores are lowered each day in the payment cycle.
3. Develop a personal relationship with your banker.
It is important to become known to your banker. It’s always been helpful to know your local banker before you need service. During these credit constricted times, knowing your bank’s small business loan officer may give you a leg up when the bank decides who they will lend to. While your company financials will be analyzed for viability, when funds are limited your bank is likely to show preference for borrowers they know.
4. Market creatively to increase your community profile.
During my years as a corporate marketing executive, I often heard small business owners say they could not afford marketing. While I would rarely comment, I always thought, “To survive over the long term, you can’t afford to not market.” Your best marketing effort may mean speaking at every civic club in your area and any other group that will allow you to talk to them about issues affecting them, which your services happen to solve. Perhaps it means distributing a low-cost giveaway during PTA meetings in your city or setting up a fun booth to demonstrate your unique product at every local sporting event. It may be something as simple as immersing yourself in work with the Chamber of Commerce. The most effective local marketing usually employs far more creativity than money. What does marketing have to do with credit? Well-known and well-respected businesses are likely to receive preferential treatment by local creditors. Your brand, image, public perception matter when you’re seeking credit. Increasing awareness of your business will smooth your path to credit.
5. Establish a line of credit.
Many small businesses hum along handling their day-to-day business requirements, staying out of debt, and not worrying about longer term financial needs. It is true that the best time to get credit is when you don’t need it. If you’re managing a financially stable business with no line of credit, stop by to see your friendly banker and ask what you need to do to establish a line. Take the required steps. Think of a credit line as a safety net for your business. You hope you’ll never need to use it. However, if current economic forecasts are accurate and we remain in this unpleasant financial soup though 2010, you may be very happy to draw on a line of credit to get your business across some rough patches.