When it comes to business, especially when you first start out or you are growing is that you will have some debt. The key is that managing that debt is much like managing your personal debt. Your business will, over time, develop its own credit score. Maintaining and building that credit score is much like what you do for your own household.
So what are the best practices for business debt? They are pretty simple, but sometimes it is a good idea for us to remind ourselves of exactly how debt and credit work for businesses. Here are the five best ways to manage business debt.
Stay In Your Budget
Much like your household budget, it is important to stay within your business budget as well. When things are going well, it is easy to overreach and go into debt for things you think you might need someday or even things you just want. It is better to delay gratification until you have money in hand.
This means that as a business you should have a few kinds of savings accounts as part of your budget. Of course, you need a tax savings account to pay quarterly and end of year taxes. You should also have an emergency fund, and that should mirror the one you have for your household, containing enough money to cover your fixed expenses for three to six months.
Besides that, you should have a general savings account, one that can be used for major purchases or at least to mitigate their cost. This means you will go into little or no debt unless you absolutely have to. One of the best ways to manage business debt is to have as little as possible, and to stay in your budget so you don’t go into any unless you need to.
Watch Your Debt Ratio
The other thing you can do is watch your debt to income ratio. Not only will this improve your credit score, but it improves your financial outlook. Make sure that you are not using more than 30% of the credit you have available, and that you don’t have debts that exceed 33% of your income.
For example, if you have a credit card with a $6,000 limit, you should not carry a balance of more than $2,000. Whenever possible, your balance should be below that level, and you should try to never spend more than that in a single month. If you do, consider making double payments that month to keep your debt under that threshold.
If your business income is $10,000 a month, you should not have regular debt payments that exceed $3,300. This means that 2/3 of your income is disposable and puts you in a good cash position.
The lower your debt ratio, the greater your profits and also the better your credit score.
Check Credit Scores Often
Just like your personal credit, you should check your business credit score often. There are services that will track it for you and send you alerts to sudden changes that could indicate identity theft or other issues. Even if you don’t receive alerts, you should check scores on a monthly basis and track them for your reference.
When you go to sell your business or seek financing for growth or other purposes, your credit score will be a huge factor. Any sudden changes should be examined, and you should look over reports carefully to make sure your business is not a victim of fraud. Your credit history as a business might impact your personal credit as well, and vice versa. So be sure to monitor both and build your business credit.
Borrow To Build Credit
If your credit score is weak, you may need to borrow money to make it stronger. Take out a credit card and use it, paying it off every month without carrying a balance. Take out a personal loan and pay it off on time but not too early, showing that you can make extended payments over a period of time.
You can even often get a business line of credit from your bank, use it, and pay it off in a timely manner. Since the largest part of your credit score is your ability to pay on time, you may have to borrow and use credit to boost your credit score. This can be vitally important when you are in a situation when you need to borrow down the road, especially if your business buys property or other assets.
Pay On Time Or Even Early
While we have been talking about this all along it bears repeating. Paying on time is the number one factor in your credit score. The older the accounts you have that show a history of paying on time, the stronger your score. If you pay late, even once it, really impacts your rating and risk status.
This means the mantra of pay on time or pay early is vital in any credit management plan. Your business will have debt from time to time. It is nearly inevitable and in some cases desirable. The most important thing is how you manage that debt. Follow these five ways for business credit success.