Tag Archive: business_credit

Five Steps to Business Credit

 Operating without loans can have significant impacts on your cash flow and working capital and does nothing extra to build your business credit. Five Steps to Business Credit

Maintaining good business credit is essential, as a bad credit rating may severely hinder your business growth and expansion. Without good business credit, banks can be less likely to accept your loan applications. Operating without loans can have significant impacts on your cash flow and working capital and does nothing extra to build your business credit.

 

In addition, if you skirt your financial responsibilities, it’s unlikely that suppliers will extend your business a trade or credit account. That means that you may lose the ability to leverage the 30-, 60-, and 90-day terms of invoices as short-term loans. In addition, many businesses enjoy discounts provided by suppliers to encourage prompt payment; cash customers usually do not get such discounts.

 

If your business does not have good credit, you can take steps to repair it. The first step to building your business credit is to contact your creditors to set up payment schedules. Such schedules should be reasonable and fair to both your business and the creditor. If you have some history of paying bills promptly, you may find that creditors are willing to set up alternative payment schedules. In addition, successful completion of a payment schedule often leads to a continuing relationship between businesses and creditors.

 

Late payments or unpaid invoices can often be traced back to housekeeping or paperwork issues rather than cash flow problems. Even these types of mistakes can affect your business credit.

To determine the root cause of the problems ask yourself:

  • Are your creditors sending invoices to the correct address and person?
  • Are your payment checks being sent to and received by the correct department and person?
  • Are all parties clear on when payments must be made?

 

Additionally, listed below are steps you can take to improve your business’s creditworthiness:

  • Always pay on time. The ability to repay loans promptly has a great impact on business credit scores. You should endeavor to always pay within the terms you have with your suppliers. On-time payments are the most direct way to improve a business credit rating.
  • Pay your biggest bills first. Some business credit scores are dollar weighted, such as the PAYDEX ® Score. Therefore, if you are consistently paying all of your smaller bills but neglecting your largest, your Paydex score can suffer.
  • If timely payments to suppliers and lenders are not included in your business credit profile, your business may not get the credit it deserves for paying your bills on time. You should monitor your business credit profile at least twice per year to ensure that vendor payment relationships are included.
  • Stay on top of your business credit profile. You must ensure that your business credit profile information is complete and accurate. Address any inaccuracies immediately. Certain business credit companies offer customer services and online tools that can help you update and manage such details.
  • Contribute to your company’s credit profile. You can communicate to the credit bureaus as well. The more information you give to credit bureaus like D&B, the more robust your business credit profile will be. In addition, try to choose suppliers and vendors that report their experiences to credit bureaus, which can also boost your profile.

Many businesses are feeling the pressure of tightened credit requirements. However, by carefully planning and executing your plan, you can help fix and improve your business credit.

How Much To Ask When Applying For A Small Business Loan

How Much To Ask When Applying For A Small Business LoanHow Much To Ask When Applying For A Small Business Loan

It’s a question that besets many small business owners when applying for business loans: how much should I ask for? More so than deciding on which lender to approach, not having a sound estimate of how much capital you need to borrow could lead to cash flow problems—which could lead to your business shutting down. How Much To Ask When Applying For A Small Business Loan

How then can small business owners determine how much financing they need when approaching lenders? What factors should they take into account when calculating the ideal sum of their business loan?

Be clear on the reason for the loan

Are you launching a startup? Or do you need the loan as additional working capital to make improvements in your business? Answering yes to either question is critical when deciding on how much you need.

Denise Beeson, a small business-funding consultant who previously lent her services to a local SBA-administered Small Business Development Center, a provider of mostly free resources and training to small business entrepreneurs, in Santa Rosa, California, always asks her small business clients the previous questions whenever they come to her about wanting to apply for loans. For those with startups, she does issue a caveat: “If this is a start-up, I remind them that an SBA preferred lender does not fund startups,” says Beeson “We then discuss where they may find funding, such as peer-to-peer lending options, tapping into their personal resources, or asking family and friends.”

If the small business owner is seeking to buy a business from another, Beeson notes that the seller may fund the loan. How Much To Ask When Applying For A Small Business Loan

 

Also, if the small business owner is seeking working capital for myriad reasons, which might include increasing the marketing budget, making renovations, or paying off debt, Beeson says she will ask clients if they can produce documentation verifying that the debt was accrued as a result of the business.

 

Without providing the necessary paper trail needed to accompany a loan application, small business owners could hurt their chances of getting financing from a lender, insists Beeson. To prove her point, she offers the following anecdote:

 

“Recently a restaurant client was interested in an SBA loan to consolidate debt based on improvements to the premises,” she recalls. “They had almost $100,000 in debt including credit card debt that was claimed as accumulated to the business during the recession. However, when we looked at the statements, the entries were not clear when and what had been done. In addition they could not produce any paid invoices from contractors or suppliers linked to the credit card statements. Unfortunately, we could not move forward because the borrower could not provide the needed documentation to the preferred SBA lender.” How Much To Ask When Applying For A Small Business Loan

Consult trusted financial professionals

If you are unsure or confused about how much you should ask for when applying for a business loan, it might behoove you to visit a financial expert such as a reliable bookkeeper or a CPA that regularly deals with small business clients. By reviewing your financials, he or she can then approximate how much financing you will need, taking into account existing debt obligations and operating revenue. And a word of caution: don’t be lax or lazy when it comes to understanding your financials. Sloppy bookkeeping or a lack of knowledge about your books or tax returns will prevent you from acquiring a loan.

Take into account your other non-related business expenses

To determine how much you’ll be able to repay and the length of the loan’s duration, small business owners need to do a cash flow analysis of all their expenses, including mortgage payments or auto loan payments. By doing so, a business owner will be able to develop a more viable estimate of how much they’ll need to borrow from a lender.

 

Rohit Arora, CEO of the six-year-old Biz2Credit.com, feels this is an imperative step for all small business owners to take when deciding on how much of a loan they should apply for.

 

“A lot of business owners don’t take [their miscellaneous non-business expenses into account when deciding how much money they should borrow,” he says. “Everything boils down to your repayment capacity. So if you feel that you can borrow some money and there’s some good opportunity that will help you make money off it, that’s good. But that calculation is not a certainty.” How Much To Ask When Applying For A Small Business Loan

Carefully consider payment terms

After you analyze your financial situation, both on a personal and business level, you will also need to decide on how long you want to pay off your loan. By following this best practice, you will be able to produce a rational figure as opposed to an amount that you will never be able to discharge in light of your finances and debts.

Arora agrees, offering a hypothetical scenario: “Let’s say a business owner is borrowing $100,000 and they have to pay back everything in one year,” he explains. “Then the amount of repayment they have to make in terms of speed is pretty steep. Typically for small businesses, the cash flow is their bloodline.”

Similarly, Arora says small business owners need to exercise extreme caution, particularly if they’re planning on borrowing from alternative lenders. “A lot of times they want their money back pretty quickly,” he warns.

Know the lender

When figuring out how much money you need to borrow, it’s vital that you research your lending options. Which banks or lenders are amenable to small business owners in your sector? Just conjuring up a random number for a loan will not help you if the lender is not open to your industry, says Beeson, who advises business owners to also explore nontraditional lending options.

If you need to figure out how much of a business loan you should ask for, you will need to know offhand all of your business and non-business expenses. Not only is this information essential for maintaining good credit—a prerequisite for getting a loan—but it will help you come up with a realistic number that will allow you to comfortably fulfill repayment terms and not disrupt your cash flow. How Much To Ask When Applying For A Small Business Loan

5 Tips for Optimizing Your Cash Flow

5 Tips for Optimizing Your Cash Flow

Iris Dorbian.

5 Tips for Optimizing Your Cash Flow.  For a small business owner, managing your cash flow, (the movement of cash to and from your business as opposed to cash deposited in a bank) may be your most important responsibility. In fact, in a recent poll conducted by CPA2Biz, the marketing and technology services subsidiary of the American Institute of CPAs, 83 percent of the 500 small businesses surveyed reported that their prime concern is maintaining adequate cash flow.

And according to the Small Business Administration, the federal agency that provides support and resources to small business owners and entrepreneurs, the failure to manage cash flow is a significant reason why so many small businesses close their doors each year. Make no mistake about it: Even if it’s unintentional, just a mere oversight or misstep in your handling of the company coffers can cause untold damage to your reputation, brand, and credit rating. How then can you prevent such errors from happening while optimizing your cash flow? Here are five cash flow best practices that can steer you in the right direction. 5 Tips for Optimizing Your Cash Flow.

1. Negotiate with vendors

This takeaway can be a great method for pre-empting future financial headaches. If you’re experiencing a fiscal pinch, talk to your vendors about extending due dates. Or try re-negotiating payment terms. Remember, your vendors are also in business and they, like you, want to get paid on time.

John Burger, owner of the online toy company Playfully Ever After, has made this tip a key underpinning of managing his company’s cash flow. And based on his experience, most vendors are willing to be flexible if it guarantees payment. 5 Tips for Optimizing Your Cash Flow.

To bolster his point, Burger, whose company is based outside Dallas and has seven employees, recounts an experience where re-negotiating with a vendor garnered positive results.

“We hit a cash-flow crunch after spending quite a bit of money at the Toy Fair 2013 expanding into new toy lines,” he recalls. “There was no way we could place the large orders we needed to make to sustain our top-selling brand. I called and talked with our rep and they were more than willing to work with us. In fact, they even offered us special terms. From now on, we only have to spend $3,500 to get the same 10 percent discount or $1,500 to get a 5 percent discount. This meant we could reorder more frequently and keep items in stock, which increased sales for both of us.”

OptimizeCash_PQ.jpg2. Build yourself a cushion

Almost every business goes through an up-and-down cash cycle. Such fluctuations can often be dictated by myriad factors that range from seasonal trends to the overall health of the economy. During periods when your cash flow is booming, don’t get complacent and risk your business with extravagant or unnecessary expenses. Be prudent in your spending and start saving for those periods when money might not be flowing like champagne. 5 Tips for Optimizing Your Cash Flow.

Adrienne Polk, operations and strategy manager of the Washington, D.C-based Ross Business Management, a provider of financial and operational solutions to small businesses, agrees. “You want to create a buffer along the way, not just once in a while,” she says. “This will allow you flexibility and more breathing room in your business. When you are down to the wire all of the time, it can be completely paralyzing. Although you may need to spend money to make money, if you are paralyzed by fear or lack of funds, your business will suffer.” 5 Tips for Optimizing Your Cash Flow.

3. Trim unnecessary expenses

If you want to attain a strong grasp of your cash flow, then it behooves you to make a thorough and detailed assessment of the items that can be cut from your balance sheet and what can stay in. Scrutinize your expenses. Figure out what is essential and what can be excised.

“You
don’t have to buy the employees lunch, take a client golfing, or spend money on a birthday cake,” Burger explains. “Those types of things can wait. It’s more important that your employees get paid and you have money to buy product.”

4. Request prompt payment of services

This might sound like a no-brainer solution to cash flow problems, but it bears repeating when dealing with vendors and/or clients. 5 Tips for Optimizing Your Cash Flow.

Andrew Schrage, co-owner of Money Crashers, a personal finance website, agrees, but notes that debtors might need to gain an incentive to ensure prompt payment. “To motivate debtors to pay quickly, offer a small discount for prompt payment,” he says. “So even though you may take a bit of a hit on profits, it’s ultimately worthwhile.”

5. Tighten up employee hours during slow times

To better optimize your cash flow, you might consider reducing hours for employees during the slow periods. This tip has worked wonders for Burger’s Playfully Ever After staff. When his business was experiencing the doldrums, Burger had his hourly staff start work one hour later. And on days that were especially slow, staffers were told to go home earlier than expected.

“This saved an extra $600 a month in payroll,” he explains. “Every bit helps.”

Along the same lines, if your cash flow problems are growing increasingly dire, short of terminating your staff, you might also want to change employees’ salary status to an hourly basis. “Most employees hate this and it can be a tough sell,” admits Burger. “But it allows you to save money on slow
times when employees may not be working as much. If your business is in jeopardy, this is an option you should think about.”

Other ways to solve your cash flow problems courtesy of Burger are as follows:

Offer one free vacation day instead of pay raises. “To improve cash flow for the next year, give everyone in the company an extra day off each month in lieu of pay raises,” he says. “I had an employer do this once, and at first people were upset, but then we learned to love having the first Friday off of every month.”
Establish a line of credit. “Talk with your banker,” advises Burger. “Most banks are more than willing to help you establish a line of credit for your business. You don’t have to use it all the time, but this can help when cash gets
tight.” 5 Tips for Optimizing Your Cash Flow.

To maintain the longevity of your business operations, it’s imperative to manage your cash flow as wisely as possible. In this area, there’s no room for carelessness or irresponsibility, especially if you want your business to survive the long haul. 5 Tips for Optimizing Your Cash Flow.

Credit Where It’s Due: Five Simple Steps Toward Better Business Credit

By Sherron Lumley.Sesame3.jpg

Delicious old-fashioned donuts are on display behind Nasima Rahman, who stands at the counter of Sesame Donuts, greeting her morning rush of customers with a warm smile. “My wife throws in extra donut holes,” says Mohammed Rahman, her husband, “because making people happy is very important to us.” This emphasis on customer service has led to a quickly growing small business, and recently Rahman has been courted with offers for ample new credit lines, far more than the business needs. In fact, Rahman completely self-financed the business, so how did the credit for Sesame Donuts get to be so good?

Small businesses have credit scores apart from the personal credit ratings of the owners based on as many as 150 different factors in addition to information that is submitted voluntarily. The score can vary vastly from the personal credit rating of the principal, something that can come as a bit of a shock to the small business owner who has worked hard to guard a sterling personal credit rating, but gets denied business credit seemingly without cause. The business credit score will influence things such as credit approval, financing costs, credit card interest rates, insurance premiums, rental terms, and terms from suppliers.

The business credit score works in a similar way to the personal credit score system, but with a range of 0 to 100 points instead of 350 to 850. On that scale, 75 is considered good. Understanding how business credit is established and tracked is the first step to improving your business credit rating. Let’s take a look at five simple ways to build business credit.

1. Establish a business credit history

One way to establish a credit history is to set up a commercial bank account to pay bills. Put expenses, such as the business telephone line, in the name of the company and use the business checking account to pay the bill each month.

Callout.png“A company is only as strong as its banking relationships,” says business consultant and author Martin O’Neill in his book Building Business Value. Getting started with a business bank account helps to build an important foundation for future conversations. Don’t wait until the business needs money to build a banking relationship.

One of the first things that Rahman did as a small business owner was get an employer identification number (EIN) from the Internal Revenue Service. “It was very easy, I went to the website and filled out a form,” he says. He also registered his business and “doing business as” (DBA) name with the state of Oregon and paid for the business license. He then opened a business bank account for Sesame Donuts.

2. Register your company with business credit bureaus.

With an EIN and a business bank account, a business credit profile that’s separate from personal debts is established. However, if the business is a sole proprietorship or partnership, the business owner is personally liable for the debts of the business and all personal assets are at risk in the event of litigation. Because of this, as a sole proprietor or partner, personal credit information could still be included on the business credit report and vice-versa.

Dun & Bradstreet, Experian, and Equifax USA are three of the major credit reporting agencies that compile business credit reports. Register online, for example, by getting a D-U-N-S number with Dun & Bradstreet, which will help to quickly establish a business credit file.
3. Pay bills on time

In addition to an EIN, separate bank account, separate phone number, and a D-U-N-S number, vendor accounts and a credit card will help to establish the credit for the business separately from the individual.

Rahman uses a Costco business credit card to purchase supplies and holds two other business credit cards. The best way to build or improve commercial credit scores is positive payment history, which means making regular payments on time.
4. Monitor the business credit file and keep it up to date

Payment history is important, but credit ratings are based on multiple factors such as the industry the business is in, company revenues, and number of employees. Actively manage the file by keeping financial records and updating the credit profile to reflect any changes that occur. Maintaining a file that is current and accurate will help to guard against identity theft as well. According to Dun & Bradstreet, 15 to 30 percent of all commercial credit losses are due to fraudulent activity.

5. Comply with the business credit provider requirements.

The business credit market has its own set of requirements and businesses seeking credit approval must be in compliance. Overlooking simple things such as obtaining a business license or failure to have a telephone line can raise red flags with credit bureaus, so take the necessary steps to set up the company properly in compliance with local, state, and federal regulations. The list of business credit market requirements can be found online at iBank.com.

At this point, Rahman says, Sesame Donuts is making a small profit and they are happy with that, not wanting more. The customers are happy and they enjoy a good reputation in the community. Knowing that his business credit is good is a feather in his cap, and a sign of success won through hard work and careful financial management.

Resources

Books:

Building Business Value, by Martin O’Neill, 2009

Guide to Credit and Bankruptcy, The American Bar Association, 2009

Legal Guide for Small Business, The American Bar Association, 2010

Web:

Dun & Bradstreet

http://smallbusiness.dnb.com/

Entrepreneur.com: “The ABC’s of Business Credit,” by David Gass

http://www.entrepreneur.com/article/76886

Equifax USA: http://www.equifax.com/home/en_us

Experian.com: http://www.experian.com/small-business/understanding-business-credit.jsp

Federal Trade Commission: “Getting Business Credit” http://business.ftc.gov/documents/alt043-getting-business-credit

Internal Revenue Service: Employer ID Numbers http://www.irs.gov/businesses/small/article/0,,id=98350,00.html

U.S. Small Business Administration: “Why small businesses should manage their business credit” http://www.sba.gov/sites/default/files/oee_5_simplesteps_brochure_managing_your_credit.pdf