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In good and bad times, credit can help keep a business steady. It provides financing for new growth initiatives, or temporary relief during a cash flow crunch. To help keep your business healthy even in a down economy, follow these tips for improving how your business manages credit.

Keeping Your Business Healthy

By Richard Flynn



There’s no denying that the economic landscape at the moment is looking rather parched. And, as a result, small businesses throughout the country are looking to refresh their business by devising inventive ways to attract new business and keep existing customers happy.


Although these efforts are exactly what’s in order — and what’s expected from this highly entrepreneurial group — it’s also important to be prepared with the tried-and-true backup of strong credit to help keep your business healthy.


In good and bad times, credit can help keep a business steady. It provides financing for new growth initiatives, or temporary relief during a cash flow crunch. To help keep your business healthy even in a down economy, follow these tips for improving how your business manages credit.


 


Put your best foot forward


Lenders look at a number of sources to judge your business’s creditworthiness, and they will look even more closely in the current economic climate. If you’ve established a strong history with a specific lender, that’s a great start, but lenders also generally look beyond their own records to assess your credit history, turning to personal credit and commercial credit bureau reports. To put your best foot forward, begin by making sure your business is registered with the major reporting agencies, such as Dun & Bradstreet, Experian and Equifax. The more sources of information there are about your company, the easier it is for lenders to confirm that you are an established business. When registering with reporting agencies, be aware that most offer a variety of services to small businesses. These include some that are free and others that are available for a fee; so carefully research which options are best for your business. You’ll also need to review your company’s profile and credit report often so you can address and correct any inaccuracies. For example, is the Service Industry Classification (SIC) accurate? If not, your company could be seen as part of another industry entirely. If you’re unsure which SIC code applies to your business, visit [ital>http://www.osha.gov/oshstats/sicser.html<ital] for the code that best describes what your company does. Also, review the entire payment history in your credit report carefully, checking any Uniform Commercial Code (UCC) filings to confirm information about leases or liens that apply to your business.


 


Find the right balance


Once you’re prepared to make the best impression possible, apply immediately for any credit you anticipate needing. If you wait until you actually need it, your credit record may already be less attractive to lenders. Furthermore, securing credit with terms you’re comfortable with takes time — a luxury you may not have later.


A far greater challenge than figuring out when to seek credit is knowing how much credit to apply for. Applying for too little can leave you strapped for cash, but applying for too much credit — or too often — can adversely affect your credit score. It’s important, for example, to have enough short-term credit to cover short-term expenses, such as chemicals and other supplies. But if you have too much, you may be turned down for vital long-term credit when you need to finance a new backhoe or pickup.


You can determine the right balance for your business with a C.P.A. or other trusted financial advisor. But, in preparation, make sure you have a good understanding of what your current expenses are and what your future expenses may be. While reviewing what you currently spend, take time to question whether your expenses are really as low as they could be. Monthly expenses are a particularly great place to cut back. Speak to long-term vendors and find out whether you can renegotiate a deal. If you’ve been a solid, long-term customer, a slow economy may offer room to negotiate.


Also evaluate your business’s efficiency. Many businesses become set in their ways, but lean times are a great opportunity to streamline. As you’ve grown, perhaps you’ve outgrown how you purchase supplies. There may, for example, be a way to gain a discount by making fewer, but larger, orders.


 


Protect what you’ve earned


If your company has good credit, as well as an appropriate amount of credit on hand, you’re in great shape, but you’ll have to work to maintain your good standing. One of the easiest ways to maintain good credit is simply to pay on time. As easy as that sounds, however, routine tasks like paying the bills can sometimes be overlooked in small businesses since owners and employees generally wear several hats.


To avoid this problem, set up a fixed procedure for reviewing and paying the bills each month, and appoint one or more people to carry it out. You should also take advantage of any tools that lenders offer to make timely payment easier. Some offer the option of setting up automatic payments each month, as well as account alerts by e-mail or text message to keep you informed. Many lenders also offer the convenience of paying online or by phone, which allows you to hold onto cash as long as possible while still paying on time.


To make sure you’ll have the cash to pay your bills, take a close look at cash flow management. Proper cash flow will give you the means to pay the bills and help you avoid overusing or misusing credit. To keep cash flowing, look for ways to make your invoicing more efficient. When dealing with commercial customers, familiarize yourself with their invoice protocol and learn who manages payments. It will reduce delays and help keep you informed about when you can expect payment. Another way to improve cash flow is to bill electronically and receive payments by electronic funds transfer. You may also want to consider accepting credit cards for payment if you don’t already do so, because it can limit your exposure to late payments and provide cash quickly.


Regardless of how carefully you manage cash, you will at some point need credit. The key is to make sure you use it wisely. Use long-term credit for long-term investments, and short-term credit such as credit cards and credit lines for short-term expenses. And above all, don’t use it when you don’t really need it. If debt evens out cash flow or contributes directly to revenue, then it’s probably worth considering.


When using credit and charge cards, consider making purchases with business cards that offer rewards — such as air miles, cash back and rewards points — that can be redeemed for a variety of retail and travel benefits. Also, use charge cards when you can pay off purchases in full by the end of the month. Every penny counts in challenging times, so be sure to pay off bills when funds allow. These payments will reflect positively on your credit profile.


 


In dealing with the current economic situation, keep in mind that the one truly good thing about tough times is that they don’t last. So in anticipation of greener times, take this opportunity to build a more resilient business that will soar when the economy eventually rebounds.


 


 


Richard Flynn is senior vice president and general manager for American Express OPEN, a leading issuer of small business card products. For more tips on managing credit and building a resilient business, visit OPENForum at www.openforum.com OPENForum was created by American Express OPEN for small businesses seeking community building opportunities, specialized small business content, and advice from business leaders.

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