Building Smart Business Credit – Part 1

The most important part of your business operation, but often overlooked, is your company's credit profile. It is the life blood of your operations that dictates your buying power, cash flow and the ability to grow your business. What does it take to build and maintain a good credit profile? Find out.

This is one topic I can speak about from the heart since I spent most of my career as a credit and finance manager in the recreational products industry. There are a number of characteristics of a company's credit habits that dictate whether that product order is going to be approved or held. Orders placed on hold for credit reasons or inadequate operating lines of credit can mean the difference between profit and loss.

Did you know?

  • Business credit can help grow your business
  • Good payment practices are the key to a strong business credit profile
  • Separating business credit and personal credit can greatly mitigate your risk
  • There are 4 keys to building business credit
  • Credit applications can be made easier by following a few simple steps

To understand how to build a good credit profile you must first think like a banker or credit manager. All credit is governed by what we call the 4 Cs of business credit. They are Character, Collateral, Condition, and Capacity. Credit officers will weigh each of these aspects of your company's credit profile to establish whether credit will be approved, so let's look at each one of these criteria in detail.

  1. Character: In this world of contracts and written agreements your word is still your bond in business. If your business or personal credit profiles show spotty payment history, liens, judgements or other red flags you will need to be able to explain those factors or build on a longer period of steady payments before seeking new credit. Moreover if you make a commitment to your supplier or finance company that you are sending payment, you must live up to the promise. Trust plays a huge role in credit and this speaks to the character of the business and its owner.
  2. Collateral: Nothing is for free in business so you must be prepared to offer collateral to underwrite your credit requirements. Depending on the equity position of your company, this may mean security agreements, assignment of assets like inventory, business equipment and receivables. It may also require the assignment of personal assets like real estate, investments and/or personal guarantees. You should prepare an inventory of collateral you have available so you can negotiate with your creditors to meet their requirements from a positive position.
  3. Condition: A solid business credit profile indicates a strong financial history or, in other words, a business that is in good condition. You should first review your business and personal credit bureau reports to ensure you have a solid credit history. Next you should prepare a financial performance analysis covering the last 5 years of operations that demonstrates the trends and performance of the company. Coupled with this is a written explanation of the condition of the economies in your market place and how they will affect your business.
  4. Capacity: Equally important to your credit profile is what I call your capacity to sell. Creditors want to know that your business has the ability to generate enough revenue (cash flow) to meet your payment obligations. The best way to achieve this is by preparing a financial business plan that projects your sales, costs, expenses and profit for the next year. Creditors will see through an inflated business plan, so you must be realistic in your projections. A business plan is your ace in the hole to build confidence with your creditors.

Now that we have defined the four C's of credit we can look at the specifics of a good credit profile. Stay tuned for my next newsletter where, in part 2 of this article, we will review the basics of business credit and how you can build a good profile. We will start with the way you pay, understanding credit bureau reporting, and how to apply for credit with suppliers, banks and finance companies.

If you have any questions concerning your credit profile, contact me for a free tele consult.

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