Entrepreneur’s Guide to Managing Credit Wisely is an overview of how small business owners should manage their cash flow and credit well to not get into financial difficulties.

A Gallup poll of over 600 small business owners found that over one-third of the respondents felt uncomfortable because of the debt burden they had assumed. Additionally, almost half of the survey participants said that they had found reducing debt difficult. Since many startups struggle to qualify for business loans at the bank, a good number of owners rely upon alternative financing sources and increasingly, their credit.

Since it’s increasingly difficult to establish creditworthiness for a new business with banks, entrepreneurs may turn to their personal financial ratings or assets for financing. The Small Business Administration reported that 65 percent of small companies used credit, but only about half of that credit had been established in the business’ name. Not only are these owners risking their companies finances, but they are also gambling with their credit rating. This makes it even more critical to learn how to manage credit well. Poor credit management can hurt a business, and it can also hurt the owner’s finances.

Entrepreneur’s Guide to Managing Credit Wisely: Five Tips

There’s nothing wrong with using credit if it’s managed well. The one sure way to establish creditworthiness for small business is to take loans and demonstrate that the company can make timely payments and keep balances manageable. This means that any business owners who want to use credit to begin or grow their companies need to learn how to manage credit well from the very beginning. These tips and warnings should help.

1. Avoid Mingling Personal and Business Accounts

Many business owners fund new ventures out of their accounts. Similarly, they are forced to rely upon their personal credit reports to obtain credit. At the same time, it’s prudent to establish separate credit lines for personal use and business use. It might be tempting to charge inventory to a personal credit card or personal car repairs to a business card. Sometimes, it might be unavoidable for very new startups. Still, it’s a bad habit that can lead to many problems with both personal and business finances.

A business card that’s only used for business can help managers keep track of expenses to build credit, produce financial reports, and prepare taxes. A credit line that has a mixture of business and personal expenses will be difficult to manage and is also unlikely to impress investors. Even if business owners have to use personal credit in the beginning, it’s wise to keep it separate from any credit that’s needed for personal use. When business owners do rely on personal credit, late payments for either personal or business loans can also damage their ability to obtain credit in both areas. These are all excellent reasons why it may be prudent to incorporate and use a federal tax number for business accounts.

2. Learn to Control Cash Flow

Cash flow refers to the way that money flows in and out of business. One way that successful business owners squeeze out more profit is by carefully managing the flow of cash. Conversely, poor management of money in and out of business is one of the most common reasons that companies struggle. Business owners who learn to track and manage cash flow also have a better chance to manage credit wisely.

Of course, this is one reason why it’s often wise to obtain credit before it’s needed. This ensures that businesses can remain ready to seize opportunities to increase revenues or decrease costs. Also, it’s crucial for business owners to know what times of the month that they are likely to enjoy better revenues or lower expenses than others. For example, it might be prudent to ask lenders for a due date that doesn’t fall around the employee’s payday. Managing credit wisely is always tied to maintaining cash flow.

3. Be Wary of Only Making Minimum Payments

Lenders probably love borrowers who reliably make minimum payments for years on end. While this minimum payment keeps debtors out of trouble with finance companies, it does little to reduce debt. Also, businesses that manage to establish themselves as high credit risks need also to develop a history of making more than minimum payments. When the borrower pays the minimum for years, he or she is even paying lots of interest but paying back very little of the principal. It’s likely that those business owners who are only making minimum payments are the ones who are most concerned about their use of credit.

Consider the example of a $5,000 loan at 18.9 percent. If a business owner pays $200 each month as a minimum payment, it will take over 11 years to eliminate the debt. In that time, the borrower would have paid back over $8,000 for that initial $5,000. Of course, this assumes that no other charges get made on that credit line during this time. It’s always important to understand the cost of credit and how only making minimum payments make credit more expensive.

4. Use Credit to Increase Revenue

Business owners need to be wary of using the credit on things that seem like a good idea. It’s one thing for a business to take a loss, but it’s another for a company to lose money that it doesn’t have. Since it costs money to borrow money, it’s only sensible to make sure that credit gets used to grow revenue directly. It’s always a sound business to balance the risk of borrowing against potential opportunities for increased profit.

If an investment in a larger order of a best seller would reduce inventory costs substantially, it might be reasonably easy to justify. This is especially true if increased profits leave plenty of room for paying back the debt promptly. It would be harder to justify using credit to purchase a large order of an untested product. It might be safer to buy a smaller quantity at a higher price and test it out with customers before making a massive commitment.

5. Choose Sources of Credit Well

Of course, business owners will hope to find sources of credit that offer them the most value. If possible, shop around for the lowest interest rates for new credit. Some business credit cards may also provide valuable perks, like travel points, fuel rewards, or cash back. Look for valuable rewards for each business because these can help save money.

It’s also not enough to shop for credit once and leave it alone for the life of a business. For example, introductory offers end and leave companies with higher interest rates to pay back. Once interest rates increase after this initial period, it might be time to shop for a new business credit card. If a business can’t qualify for the lowest interest rates initially, no rule stops savvy owners from looking for better deals after several months in business. It might even be possible to transfer old high-interest balances to new credit lines to save money on interest rates or get balances paid off faster.

The Keys to Managing Credit Wisely in Business

Most businesses do have to rely on credit at some point. There’s nothing inherently wrong with using the financing to give a company a chance to get established and take advantage of opportunities to grow. Successful companies pay attention to cash flow, understand the cost of credit, and always strive to maximize their creditworthiness. In short, they know that credit costs money, and they use it as a way to make more money than the credit costs.

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