The Covid-19 pandemic was a wake-up call for many leaders when it came to their business credit. Having good credit doesn’t just help you manage costs in good times — when a crisis arises that seriously impacts a company’s revenue stream, having good credit may mean the difference between staying afloat and closing down for good.
Protecting your business credit means adopting a proactive rather than a reactive approach. If you’ve laid the right groundwork when it comes to your credit, you’ll have the tools and relationships in place to help you navigate lean times and be ready to roll into recovery. To help you establish a strong credit foundation for your business, follow these 10 tips from members of Forbes Finance Council.
1. Set aside a cash reserve during good times.
The most effective strategy is to have a cash reserve when times are good. This cash reserve should be maintained at all times no matter what cycle the business is in. Following this strategy will help your business deal with unforeseeable financial circumstances and maintain a good credit rating. – Reza Ghazi, GreenFlow Financial
2. Establish relationships with knowledgeable bankers.
Protecting your credit in a crisis is impossible if you are over-leveraged when times are good. Having relationships with bankers who understand your business and have the acumen and discipline to prevent you from becoming overburdened with debt is invaluable. Credit is a lot like insurance: You have to get it before you need it because if you need it and don’t have it, it’s too late. – Heath Beam, Singular Private Wealth, P.C.
3. Don’t throw good money after bad.
Start from a place of power by securing credit before you desperately need it. On the spending side, business leaders need to be intentional about avoiding the tendency to throw good money after bad. It’s undoubtedly a tough choice, but ultimately you need to draw a line in the sand, identify the point of no return on your investment and hold yourself accountable to keep to that decision. – Shawn Sweeney, Spinnaker Consulting Group
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
4. Avoid excessive debt during good times.
The key to managing business credit during a crisis is to not overburden yourself with debt during the good times. A good leader will temper their decisions during the good times, taking into account what may happen if everything changes tomorrow. Cash and cash equivalent reserves are essential protections for businesses and can help keep you from defaulting on your credit obligations during a crisis. – Joseph Orseno, Tiltify
5. Make sure you fully understand the obligations before taking on debt.
Understand how your debt is structured, and have a firm grasp of what your options are under your obligations. Different lenders have different expectations of repayment, and not all notes are created equal. Thus, before you take on debt, make sure you understand the intricacies of your agreement. That way, you’re prepared for crisis management before you need to think about it. – Benvenuto Marcello Mezzapelle, First Tech Federal Credit Union
6. Reach out to creditors as soon as you can.
If a business leader sees a looming crisis in terms of their ability to meet their obligations, being proactive by making contact with their lenders can save heartache as well as some of the money in their wallet. As we’ve seen during the Covid-19 crisis, creditors are often willing to waive fees or accommodate payment plans. Ignoring a problem won’t save a business, but reaching out may. – Michelle Prohaska, NYMBUS
7. Pay your creditors every month.
Make certain to pay each of your creditors on time each month, even if you are paying less than the amount you owe. Communication is key: Speak with your creditors and let them know your situation. Even if you can only pay $1 a month, the vendor will acknowledge your efforts. When the dust settles, relationships built on integrity may be what you have to fall back on to maintain or reestablish credit. – Karla Dennis, Karla Dennis and Associates Inc.
8. Use digital tools to monitor your credit.
Simply put, take a proactive role in your credit health. Take every opportunity to improve your credit with steps as simple as making on-time payments and using digital tools to understand what direction your credit is heading. Being proactive about credit health can be the difference between weathering a storm successfully and seeing your business livelihood collapse at the first sign of adversity. – Dan Henry, Green Dot
9. Be wary of lending offers during down markets.
The most important thing to remember is that lenders will seek to limit their exposure in down markets. Most offers during these times will be for the benefit of the lender, not the borrower. So be very careful with special programs and anything new. Always ask yourself, “Who benefits from this change?” – Todd Sixt, Strait & Sound Wealth Management LLC
10. Don’t put all your eggs in one basket.
When it comes to credit, keep your options open. I recommend building relationships with no fewer than two lenders. This way, if you run into an issue with one of them, you’ve still got the other to lean on. Plus, you might be able to have them both compete for your business with more favorable rates. – Tyler Gallagher, Regal Assets