Part 2 - Building Smart Business Credit

In part 1 of this article we talked about the 4 components that good credit is measured against – Character, Collateral, Condition and Capacity. Once you understand the four C's you can apply them to help build your credit profile to maintain and grow your business. Find out how.

The first building block for acquiring credit is Collateral. Not all suppliers require collateral but certainly your bank and inventory finance company will. They will more than likely require a security agreement, which gives them first rights to the inventory they finance should the company enter into bankruptcy. This is registered with the provincial government and is a standard in the lending industry.

Your company's equity ratio will dictate any additional collateral required by your lenders. This may take the form of an assignment of assets, personal guarantees, letters of credit and collateral mortgages. You should not be afraid to negotiate these requirements with your lender, but remember this is not personal, it's business. They will obviously want everything they can get to minimize their risk. However, you want to limit your exposure and allow additional collateral for possible future requirements. You should also have legal counsel advise you on exactly what you are signing.

The second key building block falls under the category of Character. Your payment history is the main driver for a supplier to approve credit for the purchase of inventory. This is also the main bi-product of your business credit bureau report. A company that pays within terms at all times builds an excellent credit history that dictates lenders attitude towards your business.

Some companies think that by delaying payment for 30 or 60 days achieves two objectives. They are ensured credits owing by the supplier are processed before they pay their monthly statement and that they are preserving their cash flow. This is a total fallacy because first, in this era of new systems technology, most suppliers are on top of processing credits. Secondly, delaying payment only works once. You will only preserve your cash flow the first time you delay payment. In other words, you only save your cash flow for the first month you delay, because after that, you have to pay your monthly statement that is now in arrears. The disadvantage is all of your orders must now go for credit approval which means at least a day delay, if not more in receiving your product purchases. Remember customers do not want to wait so, if you can't supply on a timely basis they will go to your competition.

If you are processing retail finance contracts for your customers you are well aware of the value of the credit bureau report. The same applies for business or commercial credit bureau reports. You should make a habit of periodically checking your company's credit bureau report to ensure it is accurate and demonstrates the best profile possible for your company.

You should also always separate your personal credit from your business. If you use a major credit card for your business then get one under the business name. This helps build your business credit profile and separates it from you personally.

Finally, you want demonstrate your company's Capacity to sell. Having adequate available credit to service your business not only builds your credit profile but reduces perceived risk through your company's ability meet its sales potential. Lenders want to see that your credit lines are revolving and not always fully utilized.

A good business credit profile can not only be at the core of fueling your day to day business operations, but the future growth of your company. It provides access to the funding and payment terms you require to properly operate your business and, most important, builds trust in your business and lender relationships.

If you want more information on building a business credit profile or would like to discuss your company's current status, contact me for a free tele consultation.

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