A prerequisite to securing a business loan is to have healthy credit.
Your FICO score defines your credit health. You must have a good FICO credit score to obtain favorable financing for all aspects of your life; your home mortgage, your insurance coverage, your auto financing, and most importantly, your business. If you can operate your business profitably and your personal expenses do not exceed what your business can pay you in salary and dividends, your personal funding needs will be covered. Therefore, adequate and well-priced funding for your business should be your primary concern. Your credit health, defined as a good FICO score, will provide many funding options for your business during times of economic instability.
Credit card companies have made short terms debt readily available to businesses. However, credit card debt is difficult to reduce in the current economy. Over the past two and a half years many companies have had inconsistent revenues, inventory shortages, and price increases, all of which have contributed to dependency on credit card lines of credit in order to cover operating costs. Credit card companies profit when individuals and companies use the maximum credit lines, but credit scores will be lowered and the ability to borrow additional funds from other funding resources will be limited and more expensive when a borrower retains high loan balances on credit cards.
How can an SME (Small/Medium Enterprise) retain a favorable credit score, reduce and repay lines of credit and simultaneously create a positive net income?
The following advice is offered by a recognized financial advisor to small businesses:
- Review your personal credit scores from Equifax, Transunion, or Experian; for your business credit and your personal credit. If a FICO score dips below 680, consider what options provided in this article will help you raise your score to the acceptable level of 680, or speak with an experienced credit counselor for personal advice.
- Do not use the same credit cards for both personal and business expenses. Try to establish business credit. Your personal guarantee will be required, even on a business credit card. If your business is new and business credit is not available, use a personal credit card designated solely for business purposes. Always maintain different credit cards for personal and business uses.
- Make timely monthly payment of the debt. Late payments have the largest impact on lowering your score.
- Do not exceed 30% of an available credit card line of credit. Use additional credit cards to keep the debt to under 30%, even if the interest rate on the other lines of credit is higher.
- Plan for future funding needs when your FICO score is 680 or higher.
Don’t operate under crisis management in a market when many other businesses face the same crises.
- If you have determined that the business can survive and grow, consider bringing in an investor who will provide the needed interim funding. or –
- Consider bringing on an operating partner who can provide both expertise and credit worthiness.
- Prepare conservative cash flow projections, for both the short term (one year) and the long term (3 years), to help you evaluate the future profitability of your company. These projections will be a guide to assist you in how to provide for future needs. In addition, investors and lenders will be impressed with your planning and will want to review the projections.
- Ask your vendors for more favorable payment terms or consider alternative vendors who can offer better payment terms.
- Do not use credit card lines for long term investments. Finance equipment, real estate, and other long – term investments with notes that amortize over the life of the asset.
- Check your FICO score periodically to make certain there are no reporting errors. Notify the agency immediately, requesting a correction if there is an error.
- Create a relationship with your business banker. Speak to your banker about other lending options for your company – SBA loans, working capital, or other loan programs that would match your needs. If you have an acceptable credit score you will be considered a potential borrower. You should have other professionals who you trust; your lawyer, your CPA, your financial advisor, who could advise you about your funding options.
- Keep your accounting records current. They should be readily available when needed. In times of uncertainty, current financial records are vital to all interested parties.
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