How to Use Your Credit Effectively to Grow Your Small Business

Credit Card

The Number One reason that small businesses fail is lack of cash flow. Not being able to pay your bills on time means your supplies dry up and your customers go elsewhere.

Most small business owners realise this, but not all realise that effectively managing your business credit is one of the best ways to maintain consistent cash flow and to grow your business.

Why you Should Manage Your Business Credit

Efficient management of your business credit is important for a number of reasons. For one thing, it can help you to secure more credit from lenders when you need it and at much better terms.

It will also ensure that you get what you need from your suppliers on better terms. The amount of credit they extend to you will depend on your credit standing, so making sure it is sound will give them the confidence to extend your payment terms, which will in turn keep more money in your cash flow for longer.

Checking the credit standing of your customers will also show you when it is safe to extend credit to them and when not to deal with them at all. This will prevent your cash flow from drying up due to slow or non-payment of debts and ensure money keeps coming in on a regular basis.

Managing your credit effectively will also protect you from costly errors and from fraud, which accounts for up to 30% of all commercial credit losses. By monitoring your credit standing regularly, you can identify any problems and have them rectified promptly.

How to Manage Your Business Credit

Given that managing your business credit is important for maintaining your cash flow, what are some of the best ways to do this?

  • The first thing is to establish a credit profile as quickly as possible from the moment you start operating your business. Apply for credit from a few different lenders to start building your profile.

  • Secondly, never make the mistake of using your personal credit to finance your business. Even though it might be easier at first, it means you will pay more for credit later if your business hasn’t been building its own separate credit profile. It will also expose you to personal liability for debts incurred by your business if things were to go wrong later on.

  • Another good credit management technique is to leverage the money you’re already spending with other creditors to build your credit profile. Rather than paying cash for incidentals, arrange revolving credit with various suppliers and have these transactions reported to your business credit profile.

  • Good credit management also involves getting the best terms possible and sometimes going to smaller lending institutions can be a better alternative than the big banks. As well as being more flexible, smaller lenders are also easier to establish long-term relationships with, which is important for ensuring you will get the help you need when you need it most.

  • And finally, the best credit management technique of all is also the most obvious. Paying your bills on time is the most important thing you can do to ensure your business credit rating goes from good to better to best over time.

Article by Jarrod Kagan. Having practised at a major law firm before moving across to Probe Group (one of Australia’s most prominent business process outsourcing organisations), Jarrod Kagan has over 8 years’ experience in customer outsourcing solutions. With a specialised expertise in credit management and debt recovery, he now holds the position of Head of Business and Compliance and as a qualified Lawyer, his skill level and experience covers the technical aspects of credit management and debt recovery, including: best practice, compliance, legislation, strategic analysis and industry specific detail.

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