Do you give credit the credit it deserves?
If you’re planning to start your own business, or even grow your existing one, credit can be instrumental to your success. And if used smartly, it can equal big returns for your business.
But using credit can come at a cost – plus interest – so it’s very important to weigh the benefits and risks carefully. Here are some key guidelines to follow when using credit for your small business.
There are lots of ways you can use it.
Credit gives you immediate access to funds you might need to capitalize on any new opportunities. It’s also useful for maintenance, like replacing an old computer, or major capital expenses, like if you need a van for your new dog grooming business.
When to use it.
Ideally, you’d use credit as a supplement to other business savings or investments, to reduce borrowing costs. Since every business has different needs, there’s no one-size-fits-all method for determining how much to borrow. What’s important is taking out an amount that will put you in a position where you can grow and thrive.
What kinds of credit are available to small businesses?
- A business loan funds a specific, one-time expense. The business owner applies for credit at the time that they need financing. Loans typically require regular, fixed monthly re-payments over a pre-determined period.
- A business line of credit gives you a pre-approved amount for use as you need it. Repayments may vary based on the amount outstanding – if you haven’t drawn on the available credit, you won’t need to make any payments.
- Business credit cards provide re-usable credit with different payment obligations based on use and outstanding balance. They’ll give you the added convenience of using them for point-of-sale and online purchases.
Credit cards can be useful, but…
It’s important to not be overly dependent on credit cards. While it may be little, that piece of plastic can cause a lot of damage when used in excess.
Firstly, know when to use a credit card and when to look into a loan or line of credit. Ideally, you should have a payment plan for credit cards and monitor their use by your employees to make sure there are no surprises when you get the bill.
What do financial institutions look for in a small business credit application?
- The 4 C’s: Cash flow, Collateral (any security required), Commitment (any money the business owner is putting down), and Character (the credit history of the business owner/s).
- The type and history of the business. They’ll look at the applicant’s financial background, the type of credit, plus the amount. Typically, taking our a large amount yields a greater ask from the financial institution.
- Remember to shop around. Talk to several different banks and/or credit unions to see how they can meet the particular needs of your business. Their specific requirements might vary, depending on your situation and their policies.
Letter of credit.
If you’re going into business overseas, look into a letter of credit. Financial Institutions will use these in the import-export sector to guarantee future payments for goods when the buyer and seller don’t know each other.
How it works. The buyer typically applies for the letter of credit from their financial institution. Once the credit has been approved, the buyer sends this to the seller. When the items are delivered, the financial institution makes the payment from funds loaned to the buyer.
Why it’s good. A letter of credit protects buyers and sellers in trade transactions. It’s a security blanket that goods will be received before any payments are made. Plus, the seller has the word of the financial institution that they will be paid after delivering the order.
Need a little help?
Our business banking team is here to help your business be the best it can be. Make an appointment to talk to your local business banking expert.
|Kirk Croswell, Manager, Small Business Banking
Kirk is a Manager of Small Business Banking and a member of the Coast Capital Youth Get It Community Council. He loves to help business members achieve their goals and watch them grow into successful business ventures. Outside of the office, you can find him adventuring through Vancouver or playing hockey.