Financing a business can be difficult, particularly for a new business. Business owners may consider raising capital from many sources, including the use of credit cards. Consider these tips to maintain a good credit rating.
Assume that Mountainview Clothing makes heavy duty hiking shorts for the outdoor recreational market. The firm needs cash flow to manufacture shorts during their heavy production period (January and February). Mountainview ships product in early March to meet the heavy demand for outdoor gear in the spring and summer months. Bob, the owner, is considering ways to finance his cash needs in January and February.
Selling equity vs. borrowing
On a basic level, an owner has two ways to raise money to run a business. One way is to sell ownership in your business. The term equity refers to ownership. Bob could sell a percentage of ownership to an investor, in exchange for cash. The new owner, however, would have some say in the future operations of the company.
Mountainview could also borrow money. The lender would insist on a repayment schedule for the principal amount invested, along with a schedule of interest payments.
If Bob decides to borrow, he may have to put up collateral. Collateral is an asset that backs the Mountainview’s repayment of interest and principal. If the borrower cannot make the required payments, the lender may be able to take possession of the collateral and sell it. This protects the lender from losing the money that was loaned out.
The company has a variety of ways to borrow funds. Mountainview may be able to take out a bank loan, using some sort of collateral. The firm may also borrow from an individual investor or take out credit cards.
Lay your options on the table
Taking out debt has its own set of challenges. Bob should consider the interest rate of the debt, and the amount of any required collateral. Secured debts are backed by specific collateral. A home loan, for example, is collateralized by the title to the borrower’s home.
Unsecured debt is backed only by the borrower’s ability to pay. Most credit cards are unsecured debts.
The impact of your credit rating
Several national companies compile data on the borrowing history of businesses and individuals. These companies use this data to compute a credit rating. Your credit rating has a huge impact on your ability to borrow.
It’s important to make smart choices about how you use credit, particularly credit cards. This article provides some tips on credit card use for a business. Below you’ll find some other thoughts on financing a business using credit cards.
Forecasting cash flow to make your debt payments
If you’re going to use credit cards, you need to forecast when cash inflows (customer payments) will be available to make payments. In the Mountainview example, the firm needs to finance production on January and February. Shorts will be shipped to customers (clothing stores) in March.
Mountainview needs to know when customers will make payments. If they all pay within 30 days, the company can expect to pay down the credit cards in late March or early April. If clients pay later- say in 45 to 60 days- Mountainview will not be able to pay down credit card balances until later.
The company needs to be very clear on the payment terms for the cards. If the firm pays late, that could trigger late penalties and much higher interest rates on card balances. Late payments may also be reported to credit rating companies, which lowers the firm’s rating.
Monitoring credit reporting firms
Businesses need to monitor credit rating companies. This practice can help minimize any inaccurate credit reporting- reporting that can lower the company’s credit rating by mistake. Firms need to understand how to communicate with credit rating companies to remove inaccurate information from credit reports.
Correcting errors in your credit report
If your firm has trouble getting a credit report corrected, you may consider hiring a law firm that specializes in this process. Lexington Law lists some of the steps a law firm can take to correct a credit report.
The Federal Trade Commission (FTC) is responsible for enforcing consumer protection laws. A law firm can use consumer protection laws to ensure that a company’s credit report is accurate. An attorney can write letters or call the credit-reporting firm and insist that they remove inaccurate data.
Repeating the process
It’s important to keep all of these factors in mind whenever your business uses a credit card. Carefully forecast when customer payments will allow you to make credit card payments. Monitor credit-reporting agencies for inaccurate reporting. If a credit rating firm refuses to remove incorrect information, consider hiring a law firm that specializes in the credit-reporting field.
These steps will help you maintain your credit rating and maintain the ability to use credit cards with a reasonable interest rate.