Making a new startup successful is an enormously complex job that requires entrepreneurs to master a wide variety of skills, and do multiple jobs at once. At the end of the day, however, business is about money, and ensuring that there is enough of it at any given moment to keep the lights on. For many business owners in their first several years, building business relationships, chasing down payments, finding investors, and getting access to financing to keep their companies afloat is their most important job.
The most commonly used tools, and one of the most important, is financing. Businesses rely on business loans, lines of credit, and other financing tools to launch their business, to balance their working capital, and to fund growth. To have access to these tools when your business needs them, it’s important to make the effort to build a strong business credit profile.
Building great credit takes years
Unlike a personal credit score, a business credit profile isn’t just a simple number. Instead, it’s a more detailed description of your business’ credit history, its business relationships with suppliers and financial institutions, and more general information about your business. As businesses establish themselves in their first few years, their behavior shapes this profile, and creates a picture for potential lenders.
While building a solid credit profile takes time, it’s well worth the effort. Businesses who can show that they handle credit responsibly can access more financing at better rates than those who don’t. This allows them to pursue growth opportunities, and to scale their business more effectively to compete within their industries.
Be aware of dangers to your credit profile
The most important way to protect your credit profile is to ensure that your credit record is as spotless as possible. That means using credit regularly, without missing any payments. This sounds simple, but business owners know very well that it isn’t. Clients frequently pay late, and simple things go wrong on a daily basis that can suddenly leave you without the funds you need to cover regular outgoing payments. Some small businesses, just like those late-paying clients, try to deal with this by delaying supplier payments, or paying utility bills late. This, is a dangerous tactic, which can seriously damage your credit.
Another thing to be aware of is that using credit too aggressively can also harm your business. A business that’s looking to grow will often reach out to many different financial institutions, and apply for loans at all of them in hopes of finding the best deal. That might sound like a simple and effective strategy, but each of these institutions will perform a credit check, and those checks themselves will have a negative impact. It’s much better to simply sit down and speak with a representative from each institution, and to explore options more informally at first.
Building a consistent record
Building a strong credit profile is about consistently meeting financial obligations to creditors. That means using credit in the first place. Some business owners fear bad credit so much that they avoid using financing as much as possible, and this tends to backfire. A business that doesn’t use credit won’t have much of a credit history to speak for it when it is needed. A good way to use financing tools in a responsible way is to use those that are designed to make it easier to be consistent and financially responsible in the long term.
Avoid using personal credit
When launching their business, many inexperienced entrepreneurs opt to use personal loans to finance their operations, since their brand new business will often have more difficulty accessing financing of its own. Not only is this dangerous, because it leaves you personally responsible for your business’ debts, it also doesn’t contribute to developing your business’ credit profile for later.
Use supply chain finance
Supplier payments make up a major portion of the outgoing payments of most businesses. Meeting existing payment terms is critical to maintaining these relationships, and establishing excellent credit. Supply chain finance allows businesses to finance these payments through a third-party fund, which can be paid off at a later date. This gives businesses the flexibility they need to defer payments for a time when budgets are too tight for whatever reason, while still meeting all their obligations in the short term.
A strong credit profile can make the difference between expanding to accommodate that massive new client, or being left behind in an industry that might otherwise be full of opportunity. By making the effort to develop strong credit for your business, you can ensure that, when opportunities come knocking, you’ll be ready to embrace your success.
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