Four Rules for Business Credit

Consider these tips for rebuilding your financial track record.

By Glenn Croston

Opinions expressed by Entrepreneur contributors are their own.

Not too long ago, credit for small businesses flowed easily with few restrictions. But that's not the case anymore. For some, obtaining credit can be as difficult as climbing a mountain. Others are afraid of assuming excessive debt or unfavorable terms.

But while the financial world has changed dramatically, the rules for credit are really not all that new. More importantly, credit can still be a powerful tool for small-business owners, when managed wisely. "There's a return to old strategies of building credit for your business," says La Mancha Sims, co-founder and CEO of Corporate Cash, a financial consulting company for small businesses and startups. "The rules that businesses used to follow years ago have returned, but some people are still having trouble adjusting."

Relearning how to build credit will make a big difference for your business in the years ahead. Here are four rules to follow:

1. Keep Things Professional
One of the most common mistakes people make when starting a business is mixing their business credit with their personal credit. Conventional wisdom has been that there are no consequences to using personal credit cards, home-equity line or a personal guarantee for a business. While it can make getting started easier, your personal assets may be at risk if vendors pay late, contracts are put on hold or orders are cancelled.

As the owner and founder of T.M. Properties in Atlanta, Tracy McGuire is in the business of purchasing, renovating and selling properties. From the start, McGuire used his personal credit to help finance his business. But since his operation thrives on having access to credit, McGuire hit a roadblock when properties stopped selling and his personal credit dried up as a result.

Working together with La Mancha Sims, McGuire contacted business-credit specialists Dunn & Bradstreet which helped him establish a separate line of credit. He says he built his credit by starting small with a business credit card, making sure to keep personal credit completely separate.

2. Use Debt to Build Your Business
As your business gets going, paying your vendors represents an opportunity to build your business credit. Rather than paying cash, you might consider setting up revolving credit accounts with your vendors. This can help build your business credit profile and save you money down the road when you need to borrow more.

Conversely, the money others owe you can also be an asset rather than a frustration. If clients have fallen behind -- which is not unusual these days -- you can often borrow against accounts receivables to reduce cash flow problems.

3. Leverage Your Local Banker
There was a time when every business owner had a close relationship with his or her local banker, and benefited from the trust this cultivated. The banker knew your name, your kids and your role in the community.

But in the go-go credit world before the downturn, this relationship was often lost. Today, however, your local community banker does often want to get to know you, understand your needs, deliver the right financial solutions and work together with you to cultivate your business. Additionally, your local banker is almost always certain to have a powerful network of connections in the community. Solidifying a relationship you're your banker can be a valuable asset to you and your business.

4. Think of the Long Run
One of the problems leading up to the financial crisis was the emphasis on quick money. This too has changed for small businesses. More often, they are finding that they are expected to display a sound plan for the long-term and justification for loans, ideally proving themselves to potential investors as a good risk.

The opportunities to make money are as considerable as they ever were, though success often takes time. Working with others and being challenged to develop a better plan for the long run will improve your business. Combining this with effective credit use will only improve your business's chances for growth.

Glenn Croston

Glenn Croston, founder of Starting Up Green, a sustainable-business practices firm in San Diego, Calif., is the author of 75 Green Businesses and Starting Green.

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