5 Tips for avoiding business credit mistakes
Financing plays an important role in practically every business. Money is constantly required to continue critical operations as well as expand companies so they can meet more customer needs and grow both in reputation and financially.
However, credit must be used properly or it can be just as much a liability to a growing business as it can be an asset. Misappropriated borrowed funds can leave a company in a dire financial situation that can thwart growth or even cause it to go under. It is, therefore, quite important that business owners have a good knowledge of how to best handle borrowed business funds so that they can avoid costly credit mistakes.
Following are five common mistakes businesses make with credit.
1. Not Researching Appropriate Options
Many small business owners don’t consider seeking financing until it is needed… yesterday. This haste in acquiring necessary funds causes such people to jump on the first financing option that comes along which can be inappropriate and unhealthy for the company. For example, if a company obtains an unsecured loan of $20,000 then it could be reported as a full $20,000 balance on the credit line of the company’s credit report which would significantly decrease its credit rating.
2. Not Having Records in Order
Disorganization as well as haste can delay or harm a small business’s chances of obtaining a good business loan. Lenders require a great deal of information before considering a loan request. Most lending institutions will ask for such items as income documentation, at least two years of tax return forms, bank statements and the personal financial statements of the person applying for the loan. On top of these items, business owners will also have to supply any additional supporting documentation requested. If your records are not organized and readily available, it can severely delay the loan or even adversely affect it.
3. Using Personal Credit Cards for Business
It can be very tempting to whip out personal credit cards to make important purchases for your business. Credit cards are a key element in business strategies, but only company credit cards should be used. When business and personal credit data is mixed, it can wreak havoc on either or both credit reports. For example, if your personal Discover Card is used to make a large $15,000 purchase for your business, it could throw the debt to income ratio of your personal finances completely off balance, significantly damaging your ability to obtain a personal loan for, say, a new vehicle or home. This is often a major problem for those just starting out in a business venture. Credit cards for college students are commonly used to get a business venture off the ground only to produce personal credit problems.
4. Using Borrowed Funds Inappropriately
Mismanaging borrowed funds can also have a detrimental effect on your business. If you have an excellent credit rating, you may be tempted to borrow much more money than you require. Instead of simply repairing and maintaining your current fleet of vehicles, for example, you replace your existing fleet with brand new, upgraded models. This can throw your business debt-to-income ratio completely off, damaging your credit and jeopardizing any further credit requests. You should only use credit to acquire what you absolutely need and can afford at the moment so you keep your credit in good shape for future growth spurts.
5. Not Giving Attention to Credit Report
Your credit report is the number one element that needs to be cared for, polished up and protected since it is what every creditor will look at when considering loan approvals. Damaged credit reports will harm your chances of getting the best interest rates which can cost you and your company a great deal of extra money that could have been better placed in business growth.
Therefore, you should do a business credit check periodically and learn how to “check my credit score” and protect it from errors, bad credit lines and fraudulent activity. Your business and your financial future count on it!