Published By Credit Suite at March 4, 2016
When building business credit, you will need to pay attention to more than just your payment history. How you use and interact with the credit system on several levels can either be a great benefit to your company, or come back to bite you if you aren’t careful. Here are a few things to watch out for:
#1… Don’t be damaged by the bad credit of others.
Suppliers and customers with bad credit can hurt your business. Not only do you need to be concerned about your own credit profile, but that of your suppliers too. A simple example of the importance of this is what happens with accounts receivable financing. Your rates for accounts receivable financing are based on your customer’s credit rather than your own business’s credit.
The reason is that accounts receivable financing depends on your customer’s ability to pay, not yours! So even if you don’t use accounts receivable financing, you should still check credit and know who you are doing business with, because a default on the end of a customer or supplier can be as harmful to your business than any internal hiccups that you might more easily anticipate.
#2… If you must issue credit, don’t issue too much.
Businesses need cash to operate. If you’re issuing credit, especially with longer terms, and always having to chase down funds, this can drastically reduce the day to day financial health and wellbeing of your business.
# 3… Don’t take credit when you don’t need it.
While this might seem strange, financing certain operations just because you can isn’t always the wisest choice. Save your business credit for when you need it. Use credit to save available cash and purchase assets for the business. Use credit for creating and multiplying profits. But never use credit “just because”.
#4… Never use your personal credit for your business.
It blurs the line between your personal and business finances (increasing the likelihood that a lawsuit could “pierce the corporate veil”), it puts your personal credit at risk for your business’s debts, and it doesn’t do anything for you with regards to building your business credit. It’s a lose-lose scenario that should be avoided.