Building Business Credit With Low Cash Flow
Building business credit can seem frustrating, but don’t give up! You can do it even without giant cash flows.
We know that it can be tough to build the credit you need to develop your business. No credit or a low credit score can make it harder to receive a loan, which makes it difficult for your business to grow. This can be especially true when you’re starting a business without much cash flow. But every business has to start somewhere – lots of small businesses face this exact problem.
Building your business credit is a process and it’s not going to happen overnight. But you can do it. Armed with the right knowledge and an actionable plan to guide you, you can set your new business on the path to a great credit score.
Start With Your Budget
A good business credit score is based on your business’s financial health. So how do you get your financials in shape? The first step is to make a concrete, actionable plan with realistic goals and clear steps to achieve them. While the specifics of the credit rating process are deliberately opaque, there are some general areas that your plan should address. You’ll want to make sure you’re in good standing for all of your debts – falling behind on payments will take a toll on your credit. You’ll also want to make sure that your expenses are manageable in light of your cash flows. Finally, you’ll need to take a look at your overall debt level compared to your cash flow – if it’s too high, you run a higher risk of default and your score will be lower.
Some businesses take a while to generate positive cash flows, and that’s okay, but you should always be moving in that direction.
So, start with your budget. This may seem like common sense, but many startups don’t consider this. What are your expenses? And what is your cash flow? If your expenses are greater than your cash flows, is it a function of the newness of your business or is it a problem with your underlying business model? Some businesses take a while to generate positive cash flows, and that’s okay, but you should always be moving in that direction. If you’re not, you may need to reevaluate your business plan and find ways to increase your revenues and cut your expenses. The good news for startup businesses is that the overall size of your cash flows doesn’t matter as much as the ratio of your revenue to your expenses. If you’re making more than you’re spending, that’s going to boost your score – regardless of whether you’re pulling in a few thousand dollars a month or a few million dollars a month.
You may want to meet with a financial advisor to talk about specific ways to manage your budget. Healthy finances aren’t just good for your credit score – they’re crucial for your business!
Borrowing Can Help Or Hurt
It may seem counterintuitive that borrowing money can be a way to build credit, but it’s true! Taking out loans and repaying your financial obligations per the terms of the loan agreement can show your lenders that you are creditworthy, which opens the door for more credit in the future.
In fact, it can be hard to boost your credit score without a loan or line of credit. This is because lenders like to see that when you do have debt, you know how to appropriately manage the obligations and expectations that come with it. You need a track record of successfully managing your debt to give lenders a reason to trust you in the future.
Borrowing responsibly will improve your score but falling behind on a loan will hurt it – it’s all about balancing what your business can manage.
But if your credit score is low, how can you get a loan or line of credit in the first place? You have a number of options. For example, you may be able to personally guarantee a small business loan from a bank. You may also look into alternative lenders, like microlenders, that cater specifically to new businesses without extensive credit histories. And those early loans will be for low amounts – you can’t get large loans without a solid credit score. But that’s okay! You can still use that cash to support your business and taking out small loans also helps ensure that you don’t get in over your head. Borrowing responsibly will improve your score but falling behind on a loan will hurt it – it’s all about balancing what your business can manage.
Again, the total amount of your cash flow doesn’t matter as much here as what you do with it. Show that you can borrow and repay responsibly within your budget and your credit will improve.
Responsible Purchases Show Good Business Sense
As you take out those small loans early on, make sure you have a sensible plan for how to use the proceeds. Know which purchases are crucial and which ones can wait. That way, you show that you know how to handle cash responsibly and you also avoid having to take out more loans and ending up with too much debt.
Buying used can make for big savings – and may be just as profitable in the long term. If you’re in an industrial or farming setting, for example, equipment can be a major up-front cost. Before you sink big dollars into a costly piece of new equipment, research whether that same piece of equipment may be purchased used. Some experts estimate that you can buy certain used equipment for up to 80% off the brand-new sticker price.
Plan your purchases around how much you can borrow rather than borrowing to make all the purchases you want.
Buying smart is also key. Think carefully about what your business really needs and fit those needs into the loan. In other words, plan your purchases around how much you can borrow rather than borrowing to make all the purchases you want. Again, that helps you keep your business lean and efficient while avoiding over-borrowing. For example, if you know your lender will approve you for a $10,000 loan, find equipment or other necessary business purchases that fit into that $10,000 budget. Don’t make a wish list of purchases that rack up high expenses and go searching for capital to fit the list. When building a business credit score with low cash flow, it’s vital to stay realistic – and patient.
This is especially important when you have low cash flow – how you spend every single dollar matters. Managing on a tight budget isn’t always easy, but doing it efficiently will boost your business credit score over time.
Pay Your Bills
We already discussed how paying your loan debt in a responsible manner could show creditors that you’re worthy of more financial responsibility. The same principle applies to paying your bills on time. If you make it a point to pay your expenses each month, on time, you’re building evidence of a credible record of smart financial management. That information gets reported directly to the credit bureaus and a perfect record of payments will significantly boost your business credit score. Conversely, a long history of late payments can demonstrate that you’re a credit risk.
Moreover, paying bills on time is simply a good business practice. You keep up good will with your vendors and lenders and avoid losing money through penalties and late fees.
Small cash flows? Not a problem. Either your bills get paid or they don’t, no matter how much cash you’re pulling in. Just make sure you budget for them and diligently pay them in full every month.
Watch Out For Common Credit Mishaps
Many things may seem obvious – pay your bills on time! – while other concepts may be harder to pin down. For example, should you keep old accounts open? Should you max out your cards? Should you use a cosigner for your loan? How can you minimize the impact of past black marks on your report?
The answers to these questions are largely dependent on your specific goals, financial history, and your unique business situation. There is no one-size-fits-all answer. This is where you can really benefit from sitting down with a financial planner or your bank to talk about your whole financial situation and what makes sense for you.
Keep Track Of Your Score
One thing that does hold true for all businesses is the importance of reviewing your credit reports and scores. This allows you to track the history of your credit, work toward your credit goals, and be alerted of any mistakes or fraud. No matter what actions you take to improve your score, you should be keeping careful track of your progress.
You can get your personal credit report for free once a year from each of the three major consumer credit bureaus, but you’ll need to pay a small fee to get your business credit report. It’s well worth the price – you need to verify that all the information is correct and that you’re benefitting from your good practices and not being unfairly harmed by mistakes on the report.
The Bottom Line
Building your business credit with little cash flow can be a challenge, but it’s a challenge that you can conquer. While big cash flows might make it easier to get in the door of traditional lenders, they’re not a necessity. The trick is creating a track record of financial prudence and reliability. It takes time (which can be frustrating) but it will result in a strong credit score. And once you have that score, these same practices are a great way to protect it and make sure it stays high.