Using credit to defer payment on consumer spending is a way of life for most of us. Yet we may not have taken advantage of the same option for our business. Obviously, use of credit in any circumstance must be done judiciously. For many businesses, however, use of credit can be a lifeline to even out ca$h flow as well as a way to build a credit history for future needs.
Such is the case for a new business that must purchase core product or service-related items for which ca$h is required on delivery, but the sale of those items will not take place immediately. In many cases, once the $ale is made, payment could take as long as another 60 to 90 days, depending on industry practice. Meanwhile operating expenses continue. Ouch!
For any business with a delay between expense and income or one that carries accounts receivable, a credit line can act like a bridge loan to cover expenses pending receipt of payment. It can also be used to cover any unexpected operating expenses.
I’ve seen companies with many thousands in personal credit card loans supporting their business but no business credit line. That’s OK as a place to start, but it’s not a good long term financial plan.
A business line of credit is an excellent first step in establishing your credit-worthiness for future borrowing or outside funding. It operates like a credit card but is usually used for larger amounts and often carries a lower interest rate and more negotiable payment terms. Remember, however, it’s important to pay down credit line balances as soon as is practical so you’ll have the available credit when needed. Today creditors want to see lines paid down (cleaned-up) at least once a year.
So when is it time to pursue a credit line for your company? As the saying goes, it’s easier to get money when you don’t need it. That’s when you’ll be able to present your business in the best light and be prepared to provide the bank with what they want in order to “qualify” you. It seems that small business credit is undergoing some tightening in line with changes in the economy.
Denis Healy, Vice President, Small Business Banking at Wachovia Bank, says “The days of easy money are pretty much over. Banks are looking at the purpose for which operating capital will be used, as well as whether or not projected ca$h flow within a one year time period will be adequate to pay off the de.bt.”
You may have to start by applying for a company credit card. You’ll probably have to personally guarantee payments, but by applying in company name, you’re starting to build a business credit history. This is how I have built a credit line of more than $50,000. I have never used it, but it’s great to know it’s there.
It’s still not that difficult to obtain a credit card. It’s an excellent way to begin to establish a credit history and offers some relief from the need for immediate ca$h for every purchase.
Keep in mind credit card lines are usually more expensive than those from the bank. Your objective is to get what you might need at the lowest rate, so be careful about borrowing large amounts (or allowing your advances to build up) on a high interest rate line.
Small and new business resource providers like American Express, http://home3.americanexpress.com/smallbusiness/services/financing, and Staples, http://www.staples.com/sbd/cre/programs/credit/?cm_re=FOOTER*WAYSTOSAVE*Staples+Credit+Center, offer business credit cards that establish credit in your business name backed by your personal guarantee. You’re a co-signer for your company’s introduction into the credit market. It’s like a parent or relative co-signing for an apartment lease or car loan.
Be sure to read the terms carefully on any promotional offering, so you don’t find yourself paying extra high rates once the promotion period is over.
According to Healy, your business bank is probably the best place to initiate a credit line application. Make an appointment with your banker; discuss your credit needs and outlook for your business. Be prepared to provide tax returns and (probably) financial statements. Your bank has a vested interest in keeping you as a customer and is usually eager to offer extended services to small businesses. But they’re likely to be more prudent than in the recent past.
Obviously, once your credit is established you don’t want to borrow unless you need to. Many entrepreneurs put off asking for credit because they’re not sure their business qualifies. N0w’s the time to find out. Talk to your banker. Even if you have to personally guarantee your initial credit line, it’s a great way to begin to establish credit worthiness for your business and provide a stepping stone for future growth.