How to approach credit options for your business
Learn when you might be in need of credit and how to proceed.
It takes money to make money. However, borrowing and spending more than you really need can create more debt than you can handle. You may not always need to borrow money to grow your company. Here's a quick look at why, when, and how to secure and use credit options.
Consider boot strapping
Sell something, and collect the deposit.
Use that deposit to pay for the cost of goods sold or direct costs that are required to make good on your promises.
Deliver your goods and services and collect the balance of the payment due.
If you charge more than it costs to run your business, you can put the profits back into your company.
If you can boot strap, do it, even if you decide to pursue credit later down the line.
Review credit options based on your needs
An infusion of money from an outside source can help you grow your company, if you use the money to buy something that will help you make money, like a service truck, restaurant equipment, or e-marketing software.
If there is a time lag between covering the cost of goods sold, and making sales and receiving customer payments, a line of credit may help with cash flow during those times. For example, you may be able to manufacture your product in larger quantities for a much better cost. You could pay for the inventory with your line of credit, then pay down the line as you generate sales.
Credit cards are not designed to fund capital purchases. Use a credit card to pay for everyday expenses, as long as you can pay the balance off each month. The reward points and benefits can be nice perks. However, a credit card can be a poor choice for large purchases like equipment and vehicles. Instead, you might apply for a term loan for a specific purchase that may help grow your business.
Build your credit profile before you need it
At some point, you may want or need some cash to get to the next level of your business. So be proactive and nail down credit before you need it. Current and profitable financial reports put you in a good position to apply for credit. Your banker may review your balance sheet to check your ratio of debt to equity, and your cash flow situation.
If your request for credit is denied, ask why. Discover what you need to do to improve your financials and meet the lender's requirements.
At the same time, don't take on credit if you're not ready. A loan won't help if your basic business model isn't workable. If you are borrowing money to cover payroll or to keep up with escalating debt, you may be throwing fuel on the fire. If you haven't paid yourself, don't borrow money.
Instead, rework your budget. What would your sales need to be to cover all costs, including your salary? What would your selling price need to be to make the sales goal work? Be willing to raise prices, and improve your operating, marketing, and sales skills to justify them.
Credit can be a tool for business growth when used with discipline. Make sure you've planned how you will use the credit you obtain, and come up with a solid plan to pay it back as needed. Creating a sound financial footing may be a key to your business success.