What Every Small Business Owner Should Know
About Credit
By Vicki Raeburn
Small business owners
are too often unaware of just how important actively managing business credit
is to business success. Small businesses consistently agree that managing
cash flow is their number one concern, but they are surprised to learn that
actively managing business credit is the single-most important thing any small
business owner can do to ensure positive cash flow.
A poor credit
profile can have a dire impact on credit terms, insurance costs, lease rates,
and more. Being aware of your credit standing and actively managing your
credit profile is an absolute must to avoid the pitfalls.
Fortunately, small
business owners can do plenty to influence their credit profile. Here are five
key points that every small business owner should know about managing credit
and cash flow, as outlined by the experts at D&B’s Small Business Group.
Small businesses need to
know that establishing and actively managing their credit is a critical driver
for growth and success.
It’s simple. Establishing and managing a solid business credit profile is a
prerequisite for small businesses to get the best results on a number of vital
fronts:
- To get financing when they
need it and at the best rates
- To get the supplies they
need to meet customer demand
- To protect their business
from fraud
- To take advantage of
opportunities to grow
Regardless of how a small
business uses credit, other parties (banks, customers, partners, suppliers)
will often automatically check their credit before deciding to do business
with them.
Small businesses need to
know that their credit is good in order to improve their cash flow.
When a small business has a
positive credit profile, it can get better rates and terms on loans, vehicle
or equipment leasing, rentals or mortgages on business property, and on
insurance premiums – all of which leads to more cash on hand.
Financing
Good credit gets
financing when you need it. According to the Small Business Administration,
insufficient or delayed financing is the second most common reason for
businesses failing. Consider also that most loan decisions below $100k are
automated, so in those instances all that they are seeing is what’s on
your report.
For businesses with
poor credit ratings, top national banks increase credit card interest rates on
average from 9% to 18% and loan interest rates on average from 8% to 12%.
Fraud Protection
In addition,
actively managing your credit ensures that wrong information doesn’t come into
your profile due to fraud or errors. Fully 15-30% of all commercial credit
losses are due to fraudulent activity. It’s important that your profile truly
reflect how good your credit is, and that you are aware of inaccuracies.
Many companies who
have good credit may still get turned down for loans or not get the best
rates. For example, the top national banks only approve 50% of all small
business loans. Do you really think 50% of small businesses are a bad credit
risk? Inaccurate profiles are more likely the reason.
Small businesses need to
maintain good credit to attract the best suppliers.
Manufacturers, wholesalers
and business service companies are making credit decisions on your small
business. Suppliers check you out without you knowing it; perhaps a $30K
credit line could have been $60K with a stronger profile.
After a few months,
50% of a typical suppliers’ customer profile will show a decline in the way
they are being paid – making it likely they’ll check you out more than once
over time. A positive credit profile gets the supply you need to meet customer
demand under the best terms and level of service.
Small businesses
need to know that the credit of their customers is good, which also leads to
improved cash flow. By obtaining a complete picture
and assessing the credit of your existing customers, as well as prospects, you
may be able to extend credit or increase the credit line/terms you are
offering them, enabling you to get more of their business.
Small businesses
need to know the credit standing of their customers to make sure they are
extending the right amount of credit, at the right terms, to companies who pay
their bills on time.
For example if a
small business does not actively check the credit of their customers, they
would not know that approximately 75% of revenue in a typical customer
portfolio is considered moderate to high risk. Knowing the credit profiles of
customers allows small businesses to enhance their business with creditworthy
customers or protect themselves from customers who pay slowly – both of which
can lead to improved cash flow.
Small businesses
need to know that credit ratings are based on multiple factors.
Some small business owners believe they have good credit if
they pay their bills on time. It’s an important piece, but there’s much more
to it. D&B, for example, maintains 150 factors that go into your credit
rating.You need to be aware of all the factors that go into your commercial
credit rating, because this is what other businesses see and use to determine
your rates and terms.
Furthermore, your
credit may be good today, but how will you know if there is a change in one or
more of the 150 data elements that determine your credit rating. D&B finds
that the credit score of about one in three businesses declines over just a
three-month period.
It’s critical to
know about any decline in your rating before it impacts your relationships
with customers, suppliers and financial institutions.
By reviewing these
key points, and by honestly assessing how well you currently manage your
credit rating, you’ll be taking a big step toward improving the health of your
business. These pointers will alert you to the importance of being an active
participant in shaping a positive credit profile. Your business success
depends on it.
Vicki Raeburn is Chief
Quality Officer, D&B, the leading provider of global business information,
tools and insight. In business for over 160 years, the company provides
quality information that customers rely on to make critical business
decisions. D&B’s Small Business Solutions provides comprehensive credit
reports to help small businesses manage credit and get optimum loan and
insurance rates; determine whether or not to extend credit to a company, and
establish credit terms; gain insight into prospects, customers, suppliers and
competitors; and manage cash flow by reducing risk.
