Establishing Business Credit

businesscreditEstablishing Business Credit

The first golden rule to establishing business credit lines is to ask for them. If you don’t ask, no one is going to come over and say “hey, here have some credit”.

There are two main sources of business credit. That granted by a bank or other financial institution, or credit terms given by suppliers. Upon requesting a supplier line of credit – or trade terms, don’t be surprised if they perform some business credit checks. After all, you would, wouldn’t you?

Using a planned approach is essential if you are to successfully build business credit. It is important to have an idea of what you need to prove about your business, if you ever want to consider a business loan, or negotiate credit terms, or extend existing credit terms with suppliers.

It is quite common when you start a business to have to pay for things before you collect monies in. This delay requires funding from somewhere, and normally, either a bank facility or some form of supplier credit will be needed to ease the strain on the owners own capital investment.

Lets look at how credit worthiness is determined. All lenders are concerned with the granting of and repayment of small business loans in accordance with their terms and conditions.

They use what is commonly called the five “C’s” of credit. Cash flow, Capital, Collateral, Conditions, and Character.

The 5 Cs of Credit

Business Cash Flow, or Capacity to repay is always the primary factor. The lender needs to know how your business will generate the repayment.

Establishing business credit needs proof of affordability, and you will often be required to provide detailed cash flow figures from the business.

Your cash flow ultimately determines the timing and the probability of successful repayment of any loan or small business line of credit. A review of your past credit payment history both personal and commercial, will also be undertaken.

Consider using business secured credit cards as an interim measure, whilst you build your proof of ability to repay.

Capital

Capital is the money you have personally invested in your business and is an indication of how much you have at risk should the business fail.

Lenders will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business, before they will commit to providing a loan or any other kind of business funding.

In the eyes of the lender, if you have a significant personal investment in the business you are more likely to do everything in your power to make the business successful.

Collateral

Collateral is an additional form of security or guarantee that you will be asked to provide the lender.

For a start up business, the lender may require that you pledge some of your personal assets whose titles would be handed over to the lender if you failed to repay the small business loan.

As an existing small business owner you may be asked to pledge business assets such as equipment, buildings, inventory, or accounts receivable.

A personal guarantee could take the place of secured business assets or could even be required in addition to them before establishing business credit. A family member or friend may need to sign a guarantee document promising to repay the loan if you can’t.

Conditions

Conditions focus on the intended purpose of the loan and how that relates to the general business climate. Will the money be used for working capital, additional equipment, or inventory?

The lender uses its’ network of information sources to determine the relative stability of the environment in which your business will operate. It often has greater insight into local and regional issues that could affect your industry. To be successful in establishing business credit you’ll need to persuade a lender of the merits of a small business loan.

Character

Character is also a critical factor in establishing business credit. Character is how you present yourself to the lender along with your credentials, your educational background and experience in your industry.

The lender will form a subjective opinion as to whether or not you are not only sufficiently trustworthy, but professionally competent enough to repay the small business loan and generate a return on funds invested in your company.

Character plays a large role in negotiating credit terms with suppliers. Before granting you terms, you will have to fill out a business credit application, and give trade references from suppliers who will vouch for your repayment record.

At first you will be granted maybe only a small limit (low risk to the supplier) on short payment terms. Pay this on time, every time and after a number of months you’ll be in a position to negotiate a larger limit or longer terms.

As a small business owner be conscious of the fact that establishing business credit is not something that needs to be done once, but it is a part of an ongoing process, which will contribute significantly towards any business success.

A history of steadily improving business cash flow as a result of effective business cash controls, retained capital in the balance sheet from making profits, and a clean payment history to your trade suppliers will rapidly build your creditworthiness.

Book Keeping

Small Business Book Keeping

God book keeping is SOOOOO Boring!zzz

If you’ve ever been slightly overwhelmed by small business book keeping, then take comfort in the fact that since the beginning of bookkeeping history, mankind has often struggled with keeping track of his finances.

All that testing and refining by our predecessors, means that small business bookkeeping is now straightforward, logical and has the purpose of helping you fulfil 2 basic goals.

Keeping track of what you receive, and what you pay out using effective business cash controls. When you have learned the basics, and have had a little practice, its really not too bad. (No, really!)

Whether you use bookkeeping software or a more traditional set of handwritten ledgers, a well kept set of financial records can help you understand how to make changes in your business so you become more profitable, not to mention, save you money on accountants fees and make filing your various tax returns and claiming your Small Business Tax Deductions less traumatic.

There is no official “right” way to organize your small business book keeping. As long as your records accurately reflect your business income and expenses, official bodies such as tax authorities will generally find them acceptable.

As your business grows, you can expect the quantity of records, and the kinds of records you must keep to increase. One example of this is the difference between the cash method of book keeping (usually used by smaller businesses), and the accruals method.

The cash method records cash received (income) as amounts in the books as they happen, and records payments when they are physically made.

This is pretty much like most of us run our own bank accounts. We collect what we earn from our paycheck each month, then pay the bills, and if we’re lucky, there is a bit left at the end (our profit). And if we go overdrawn, we made a loss.

The accruals method is a major concept in book keeping, and aims to match the amount of income or expenditure to the time that it related to.

For example. It is possible to pay for something after you have used it. In an accruals based small business book keeping system, we would record the expense as we used it, and elsewhere the fact that we owe someone some money – in the “amounts payable” account.

At a later date when we have paid the supplier, we would reduce what we owe in the amounts payable, and our bank balance would reduce, because we spent the money by giving it to the supplier.

The actual process of small business book keeping can be made easier when broken down into three action steps.

1.Keeping the paperwork

Comprehensive summaries of your business income and expenses are at the heart of the book keeping process. Each business sale or purchase must be backed-up by records containing the amount, the date, and details of what the money was used for (e.g. I bought a power tool from Josies Toolshop for $150 on 31st March) or received in respect of (Mrs Smith paid me $100 to fix her Shower on 1st April) . This is true whether your accounting is done by computer or in a book in hand written ledgers.

From a legal point of view, your method of keeping receipts can range from slips kept in a cigar box to a sophisticated cash register hooked into a computer system. It is best to choose a small business book keeping system that you understand and can use, but also meets your business needs.

2. Summarize your income and expenditure records on a periodic basis

A Profit and Loss account is nothing more than a summary of Income and expenses, taking into consideration the period when they occurred, as opposed to when they were really paid for.

Your analysis of the records, will help you understand your business, and give you ideas about how to control it.

On a regular basis, like every day, week, or at minimum once a month, you should transfer the amounts from your receipts for sales and purchases into your books. In the trade this is called “posting”.

Your volume of transactions will normally determine the frequency you must do this. The higher the number, the more often you should post everything, to avoid losing control.

A retail store, for example, that has hundreds of sales amounting to thousands or tens of thousands of dollars every day will be using an automated point of sale system that records everything on a computer as it happens. With that volume of sales, it’s important to see what’s selling well, and what isn’t. The Devil is in the detail as they say.

If you want to leave the small business book keeping process to your accountant then don’t be surprised when he insists on your keeping some controls over receipts. With the many bookkeeping software programs now available, it is very easy to “post” to the ledger. You’ll save a lot of money in fees and leave the more critical year end and tax functions to the accountant.

3. Use your summaries to create financial reports

Financial reports are the small business book keeping prize for having taken the effort to keep your books in order.

The profit and loss report and balance sheet are the terms everyone has heard, but you may also of heard of cash flow summary and ratio analysis. It is a general rule that the more customers, and inventory your business has, the better your business will be served by more comprehensive reporting.

For example they will help you understand things such as which products make you the most money, which customers aren’t worth doing business with, and which geographical markets really don’t pay for themselves.

In summary, keeping a good set of small business financial books, will more than pay for itself with what you learn about your business, and will give you the power to make decisions in confidence that will improve your business profitability.

Getting it right with a business plan

The essential business plan ingredients

Using sample business plans and their structure, along with studying as many business plan examples as you can, will provide you with the necessary framework to consider your business from every possible angle.

Starting or running your business without a business plan is just like being a human being without a skeleton!

Not only will using a sample structure highlight any areas you haven’t fully thought through, but it will also provide you with a good idea of what makes a good business plan, and what doesn’t.

The importance of your business plan as a motivational factor in running or starting your business cannot be underestimated. You will find that your commitment continues to build as you collect information, research and write each section.

Your business plan should always accompany requests for small business loans, and lenders or any kind of angel investor will simply refuse to consider your business proposal without one.

Lenders and investors want to see your plan with the aim of satisfying key questions before they make their decision to grant funding or not.
Once you’ve commenced trading your small business plan will act as a steak in the ground, and help you measure where you expected to be against where you actually are. It will help you take corrective action as necessary.

Sample Business Plan Structure

All plans should include at least the elements listed below, and perhaps additional sections depending on the type of industry.
Executive Summary
Company Background
Products or Service Overview
Unique Selling Proposition and competitive advantages
The Marketplace
Operations
Leadership and management profiles including professional competencies
Professional Support
Risks and Threats assessment
Financial forecasts including key assumptions
Relevant appendices
Collecting the information for all the sections is time consuming and sometimes difficult. The business section of your local library is always a good place to start research. Ask your friendly librarian about how to look up market research reports, and how to investigate competitors.
If you are not familiar with spreadsheet software, constructing the necessary financial forecasts represents a significant hurdle. You have 2 choices:

Pay someone to put part or all of the plan together for you, or a small investment in some business planning software.

The advantage of using a professional is you will receive the benefits of their experience, combined with a professional looking plan.

The disadvantage is that it won’t be easy to make changes, and more importantly, because you will not have been as involved in its preparation, you won’t be as familiar with its contents as you maybe should be. Make sure to learn the contents well.

The advantages of investing in business planning software, are that you will save time and money over having a professional put the plan together for you.

You will be able to take advantage of the thousands spent consulting professionals, and users alike, by the software company in developing the product. You can disregard your worries about having any spreadsheet skills, or your lack of confidence in building a complete financial model, as this software will take care of that for you.

For less than the cost of having a professional put the plan together for you, you can produce a professional document, but more importantly continuously update your plan for new information. This means you’ll always have a first class plan ready to present to banks or investors at any time.

Palo Alto Software produce Business Plan Pro which I notice is also promoted by the UK clearing bank Barclays PLC through their Clearlybusiness subsidiary. They wouldn’t get behind promoting a product like this without giving it a thorough trial.