Credit management is often overlooked in business financial planning, but it should be a core part of your strategy. Conducting a credit risk assessment and understanding the impact of credit on liquidity is important for the long-term health of your business. Avoid these common mistakes to maintain a strong credit profile and assure lenders that you’re responsible when repaying loans.
What you need to know
- Don’t sign a credit agreement if you don’t understand the terms—doing so can cause cash flow issues and may make your finances unmanageable.
- Repay loans on time and regularly monitor your credit, as lenders will check your creditworthiness before approving you for loans.
- Your personal credit affects your business credit, so don’t ignore it.
1. Misunderstanding the credit terms
It’s easy to skim through business credit card and loan agreements without paying attention to the fine print, but assuming or not understanding the details can severely damage your business. For example, you’ll need to have a clear idea of the interest rate, fees, APR, penalties, and deadlines, otherwise your loan could disrupt cash flow. Consult your accountant or bookkeeper if you need help parsing these contracts.
2. Operating under a weak credit policy
Your company needs to establish a clear credit policy—a set of standardized rules governing what decisions you’ll make when accessing and using credit, such as credit limits and extension guidelines. Use a strategy that creates a positive accounts receivable turnover ratio, and avoid offering net invoice terms before showing a consistent profit.
3. Failing to monitor credit regularly
Lenders want to see from your business credit profile that you’re creditworthy. To help ensure you repay any loans on time, your bookkeeping or accounting department should regularly review and monitor your credit to help you avoid missed or late payments. This will help improve your business credit score over time.
4. Managing debt poorly
Missing loan repayments will hurt your business credit score, and missing them consistently can put your business at risk of default, damaging your personal credit score as well. To avoid this, make sure a clear debt management and recovery plan is part of your credit policy. Automate your repayments and have your accountant or bookkeeper regularly review your debts.
5. Overextending credit
When applying for a business loan, you’ll typically need to provide a business plan that outlines how you’re going to use the loan. Be sure to stick to this plan when possible and only take on loans you can comfortably pay back. If you’re using a line of credit or credit card, don’t use more credit than you can repay.
6. Ignoring personal credit as a factor
Lenders usually check your personal credit score during the business loan approval process, so don’t neglect your personal credit. This often happens when small business owners use their personal finances to finance their company or keep it afloat. Always keep your personal and business expenses separate and keep all your credit in good standing.
Bluevine Tip
Separate your personal and business finances with a high-APY business checking account.
7. Avoiding communication with lenders
Be proactive if you’re going to be late on a credit card or loan repayment. Most lenders are willing to defer, renegotiate terms, or restructure your loan if you’re unable to pay. Credit card issuers may be willing to waive interest charges or fees. If you aren’t upfront with your lender about your financial situation, your business and personal credit scores will suffer.
8. Lacking a contingency plan
An important part of managing financial risk is having a financial contingency plan to address potential credit crises. Many risks to your business are unpredictable, so ensure your cash flow and savings are healthy enough to weather any surprise shocks. Collaborate with your finance team to develop financial backup plans for different scenarios.
See how a Bluevine Line of Credit can help fuel your business growth.
