Starting and running a small business comes with its challenges. One of the most significant is credit management. Lack of proper strategies can land you in financial straits.
Credit management is a wide topic. It covers the policies and practices you have to ensure customers pay on time. In the same breath, it looks at how you manage debt in your day-to-day operations.
Our article explores corporate credit management for small businesses in 2021. If you are an entrepreneur, you will get some fantastic insights by reading on.
1. Develop and Establish Credit Management Policies
A corporate credit management policy acts as a roadmap to all your financial dealings. So what should you have in the policy document? Do take note of the following.
- Levels of profitability, and credit assessment regimes
- A clear guide on how to deal with customer transactions. It starts right from when they place an order, to invoicing and final payment.
- Payment and customer follow-up procedures. How do you, for instance, communicate with customers who do not make payments on time. What communication channels do you use? Are there penalties for such situations?
- Credit terms applicable to customers and how you decide on the criteria.
- Customer training on credit management
- Debt recovery and risk mitigation measures, amongst others.
Do note, preparing a credit control policy is not a simple job. There are regulatory compliance issues that you must adhere to. It also pays to put in place strategies that will protect the business.
Seek help from the experts when preparing the documents. Such include financial advisors, business lawyers, credit professionals, and so on.
2. Keep an Eye on the Business Credit Reports
Should you have a business credit profile, separate from your personal one? The answer, according to Investopedia, is yes!
Business advice 101 says you should separate your personal and business finances. Open separate bank accounts specific to each. That means any financial risk on either side will not impact the other.
A business credit profile allows you to obtain credit, without lenders looking at your personal credit profile to determine risk.
Further, the credit profile allows the company to establish its credit history. A good credit score increases the chances of getting financing from lending institutions.
The reference bureaus look at specific factors when assigning scores. These include the ability of the business to pay its bills. They will also get information from suppliers and vendors.
What happens if you have a poor business credit score? Well, you can still qualify for loans, but at a high interest level. The lenders may also ask for collateral. It protects them in the case where you’re not able to make loan repayments.
But you can fix a poor credit score with the help of a top-rated credit repair company. They will keep a close watch on your credit reports.
The monitoring can highlight any errors that can bring down your credit scores. The credit repair professionals can also remove collection accounts from the credit report.
3. Work On Your Billing Strategies
Invoicing and late payments are constant nightmares that business owners have to deal with. Yet, proper management of such ensures a steady cash flow for healthy operations.
The right strategies in billing can help overcome some of the challenges. You, for example, do not want to have too many unpaid invoices.
Take the time to understand your customers better. That chronic late-paying customer can improve with a little creativity in how you approach them. If repeated invoicing, calls, and emails do not work, think of incentives.
Say, offer a discount for payments within a specific time window. Another option would be the upfront payment as a requirement.
Do take time to research customers before extending credit. You can ask the client to show proof of creditworthiness with their repayment history. But do not depend on self-reporting only.
A simple credit check from the reference agencies like Transunion, Experian, and Equifax can give you all the information you need. Extend your research further by asking for trade references.
4. Practice Financial Responsibility
Financial responsibility means discipline in how you use money. We reiterate our earlier point about separating personal and business finances. Keep up with debt repayments because it impacts your credit score.
Delaying or skipping payments will pile up your debt. Lenders will also share such information with the credit reference bureaus.
Avoid the temptation of living beyond your means when things are going well business-wise. Lifestyle inflation is a very real condition that afflicts many. The more money coming in, the more you spend. In the end, you will start dipping into business coffers.
Keep a close eye on your books and pay your taxes. Create a schedule that the business can accommodate. If it is a challenge to make quarterly payments, opt for monthly. The amount becomes smaller and easier to manage.
Be more watchful of expenditure, if there is no ROI, then avoid it altogether. Purchases that don’t bring in returns are like pouring money down the drain.
And, the learning never stops. The best way to achieve good financial habits is to educate yourself. You get insights on what can land you in financial ruin and how to mitigate or avoid them.
Most importantly, you learn how to plan every aspect of the business. It allows for better allocation of finances to deserving areas.
Final Thoughts
Proper corporate credit management is the defining factor between business success and failure. Start by developing policies to guide every financial transaction.
Separate your personal and business finances. It also helps to have discipline when handling money. You want to avoid the temptation of dipping into company cash when you need money for personal use.
Keep a close eye on your credit reports, both personal and business. If you notice any anomalies, get the help of credit repair professionals. Remember, a perfect credit score will open doors when you need financing.
Take the time to know your customers by doing a little research. It will help determine who you can extend lines of credit to. Unpaid invoices will impact the cash flow in your business.
Finally, educate yourself on finances, and be responsible in how you use money. A business credit building course may be beneficial for you here.
