Getting Ready for a Rainy Day: Understanding the Best Credit for Your Business
By Betty Uribe, Ed.D.
Take advantage of new opportunities that arise, help achieve your business goals and avoid potentially stressful financial situations by understanding different borrowing options and planning out the credit needs of your business.
Even if you have other sources of funds and see little need for credit now, in the future you may need access to credit as an additional tool to help grow your business or manage cash flow. With some planning, you can identify what types of credit best suit your situation and have the certainty that the funds will be available to your business when needed. The best time to secure credit is before you need it!
To start, map out a simple business plan and create a financial forecast. Doing so will help you both manage your funds and identify other activities with the potential to make your business increasingly successful.
Map out a simple business plan: For credit planning purposes, your business plan should address how you will invest your time, money and resources to run your business and help it grow. Ask yourself these questions:
- Are there opportunities coming up where I will need more money than I have?
- Do I need to buy equipment, software, inventory or make other investments in the business?
- Is my business seasonal so that the cycle of cash coming in and going out creates times when I need to cover cash shortages?
Create a financial forecast:A financial forecast allows you to see when funds are needed and is a useful tool to manage your company’s cash flow. Start by forecasting your income and expenses monthly and then see the resulting balances. This will tell you when you will need access to funds and how much you will need.
The next step is to determine what type of credit will work best – a loan, line of credit or credit card.
Loan: A loan, with up-front funds and monthly payments, works well for larger, one-time needs, such as buying a business, building or equipment. In general, you will want to understand how long your investment will last and what it will take to maintain it. For example, if you are buying a piece of equipment, work with your lender to set up the loan so that it is paid off before the equipment needs to be replaced.
Line of Credit: A line of credit allows you to borrow money when you need it, gives you flexibility in paying it back and drawing funds again. A line is useful when an unexpected event occurs or opportunities appear that you need to act upon quickly. Lines of credit are also ideal for covering seasonal or temporary cash-flow shortages such as buying inventory and selling it later. It is important to remember that a line of credit should not be considered permanent financing. Plan how to pay down what you draw in a way that matches when it is used; if the item purchased will be used for six months, you should pay off that balance within six months.
Some financial institutions offer lines of credit for future equipment purchases. The line of credit acts like cash in the bank – when you find the equipment, you draw on your line of credit and that amount becomes a loan. It’s a great way to save money on interest as you only pay on the amount borrowed.
Business credit card: Another option for small business owners is to use business credit cards, which are ideal for making many smaller purchases. Credit cards can also be set up to allow your employees to charge expenses. Ask about rewards offered with business credit cards; it’s a great way to get points for travel and purchases, cash back and/or other rewards. It is best to pay the full balance monthly or develop a plan to pay off balances for larger purchases.
Start your credit legwork today by consulting your bank’s lending officer, professional advisors and online resources. Good lending officers are a great source of knowledge; allow them to educate you and educate them on your business. When the time comes when you need credit, you’ll be glad you did.
Betty Uribe, Ed.D., is an Executive Vice President of California Bank & Trust, which has launched a financing initiative aimed at minority and women-owned businesses in California called TEAM (Tools, Education, Access and Mentoring). For more information, please visit http://www.calbanktrust.com/team. You can also follow CB&T on Twitter: @calbanktrust or ‘like’ them on Facebook: https://www.facebook.com/calbanktrust.