Secure a business loan
When it comes to running a successful business, if you really want to succeed you need to have a plan for managing every aspect of your operations, especially your finances. Having the ability to access needed credit when your business is growing is absolutely critical. Even those not currently using any credit facilities, which includes many startups and early-stage businesses, should be focusing on factors that will affect their ability to obtain financing when the time comes.
In general, it's a good idea for everyone to stay on top of their personal credit rating, but if you're the owner of a small, early-stage business, it's vitally important because your personal credit often represents an important early-stage financial resource. Also, every bank will look at an owner's personal credit history when they consider extending a loan or a line of credit to a business.
A good strategy to enhance your creditworthiness is to demonstrate that you have developed and are using a solid credit-management plan in your business. You can do this in many ways, such as paying all your bills on time, avoiding overdrafts on your commercial checking account, adopting sound cash-flow management practices and establishing a “rainy day” fund to help navigate fluctuations in business demand.
Educate yourself about the difference between long-term and short-term credit. Long-term credit is generally used to finance spending of a more permanent nature, such as a term loan for the purchase of machinery or improvements to a leasehold. Short-term credit usually involves a flexible instrument, such as a business line of credit. It is commonly used to finance things like growth of accounts receivable and inventory. When your business is in the growth stage, you are likely to need access to both long- and short-term credit, and knowing how to use both will make you much more successful.
Optimizing the creditworthiness of your business is more than just a numbers game. Know the strengths of your team, and value the people who know and care about your business, including your banker. These people can help you focus on what you need to achieve and how to get there. They will also boost your standing and provide you with an additional source of valuable assistance, even in areas outside your business. Lenders will look upon this favorably, resulting in the financial backing needed to take your business to new heights.
Tips for boosting your business's creditworthiness:
• Use vendor accounts to boost your credit history. Make sure all bank accounts and credit sources used to pay vendors are in your business's name.
• Take full advantage of the terms offered by the vendor, but always pay within those terms — especially if late payments trigger penalties or interest.
• Demonstrate sound cash-flow management and risk-management policies and strategies. Managing cash flow means using an effective annual budget on a monthly basis in a way that clearly identifies spending targets and revenue targets.
• Develop a risk-management plan that identifies the risks you face, the level of vulnerability each represents to your business and contingency plans to meet them.
• Maximize the value of your existing relationship with your primary banking/lending provider. Explore additional services, products and solutions they might be able to provide to you, your business or your employees. Make a banker part of your board of directors or informal panel of advisors.
• Maintain a fluid, dynamic business plan that demonstrates to lenders that you know your market and competition, are positioned to capitalize on growth opportunities and will be able to generate additional cash flow needed to service any debt incurred. If your business has historically shown the ability to meet the increased cash demands of controlled growth, lenders will have confidence in your ability to execute on your current growth plans.
Sterling Kozlowski is a regional sales executive for the New England Region and president of the Maine Market for KeyBank. He may be reached at 207-874-7298 or by email at sterling.kozlowski@keybank.com
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