How to Get More Financial Credit for Your Business

By Barry Moltz

3 min read

The most successful small business owners know that sales are meaningless without the accompanying cash payment that goes along with them. Cash flow is the life blood of any growing business, since all companies fail for the same reason: they run out of cash. Extending accounts payable terms (i.e. taking longer to pay) will increase a business’ cash account balances.

In spite of possible extensions, vendors would like to get paid in the shortest period of time to increase their own cash balances. Furthermore, they only want to give credit to the company that can responsibly use it and maintains a track record of paying it back within terms. Commercial lenders will only give credit to companies that show an ability to repay it promptly.

Here is how to get the maximum credit you need to run your business.

Measure the Actual Business Cash Flow

Knowing how to read and monitor a cash flow statement is a critical skill for all small business owners. Cash flow information should be easily accessible from your accounting system. If you can’t read it on your own, learn how to from an accounting professional.

If this is too difficult, look at the beginning and ending balances of your bank statement at the end of every month. If the number is higher on the 30th than it was on the 1st, then the company is cash flow positive. To improve your cash flow, it’s important to know what elements of the business maximize the accumulation of cash.

Track changes in accounts payable, accounts receivable and inventory. Higher accounts payable, lower accounts receivable and lower levels of inventory will increase cash flow.

Use Business or Personal Assets as Collateral

Most lenders will give higher amounts at lower rates if the loan is secured by assets. Putting up assets as collateral reflects the owner’s higher level of confidence to repay the loan while reducing the risk to the lender. These assets can be real estate, inventory, equipment or accounts receivables. Lenders will typically assess a loan amount at 50-80% of an asset’s value. Personal guarantees can also help make the loan happen.

Earn Longer Terms on Payables

It is important to build trust with vendors by not only paying before the promised payment date, but also by negotiating for longer terms after establishing a solid track record of repayment. Vendors appreciate a company asking for longer terms instead of just taking a longer time than expected to pay its bills. It many cases, 45-day repayment terms have become standard. In some industries, it’s acceptable to pay in 60 to 75 days if those terms are negotiated up front.

Form Relationships With People at Commercial Lenders Before a Loan Is Needed

People make loans to other people, not only businesses. Let them build trust with your company a year or more before actually needing a loan. This is done by sharing the business’ progress on a quarterly basis with them even before you become a client. If possible, move your personal accounts to this commercial lender as well.

Take a Small Loan

Pay it back within the payment term to develop a track record with the commercial lender. Lenders always want to lend more money to people who’ve proven they can pay them back. When I paid off a $1.3 million loan that I owed at my last company, the bank immediately increased our ability to borrow more the next time!

Find Peer-To-Peer Loans

Companies like Prosper or Lending Club can be a source of loans. While interest rates are typically higher (i.e. 8-35%) and amounts are lower (i.e. averaging $10,000), it is an alternate source of credit. Loans can be made for up to five years.

Take Loans From Personal Life Insurance Policies

While this source of capital can be risky if not repaid, the owner is in reality borrowing and paying interest to themselves. Policies must be of the annuity or whole life type, not term life insurance.

Ask Friends and Family

Although this is very common, friends and family can be dangerous sources of credit. If you take a loan from a person close to you, sign a structured loan agreement so expectations on repayment and interest rates are clearly known up front. The person providing the loan is taking a risk, and you need to put that risk in writing.

Remember that friends and families give money because they care about you, not because they have accurately assessed the risk of the loan. As a result, if you lose their money, they will secretly blame you. This can be very detrimental to your long term personal relationships.

For more information on business credit, find out the ins and outs of how a business credit score works.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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