When a crisis erupts, businesses that are short on funds may rely more heavily on credit to stay afloat. Small businesses are especially susceptible to this as they’re less likely than more established companies to have sufficient emergency capital set aside.
While using credit can help your business make it through the short term, it’s important to protect that credit so you can continue to operate successfully in the long run. To help you do this, below the members of Forbes Finance Council share their best tips for protecting your business credit during a crisis.
1. Build relationships with local banks.
Local banks are usually more forgiving than a national bank with a cycling account officer. Build up personal brand equity and devote time to establishing a credible and real relationship. I have seen it pay off in spades and have a dramatic impact that exceeds the true time spent in building it. There is nothing more important than real relationships. – Andrew King, Bastille Group
2. Develop multiple lending relationships.
Established banking relationships are important to most growing small businesses. However, lenders will change their credit appetite for many reasons. Opening up discussions with other lenders will offer alternative sources if your primary relationship falls short. There is some truth to the saying, “Banks want to lend when you don’t need the money.” It’s always good to have options! – Jason Lee, Capital Link, LLC
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3. Keep in touch with your supply chain.
In a crisis, it’s important to recognize that your suppliers and buyers are likely facing the same credit issues as you are. Constant communication with your supply chain to figure out solutions together is extremely important. Stay in touch with your lenders, suppliers and buyers regularly—a short-term investment in establishing mutually acceptable payable terms could also pay off later. – Pushkar Mukewar, Drip Capital
4. Be transparent about your needs.
During an economic crisis, lenders typically tighten their underwriting criteria. A strong business credit score can help your business access credit while showing suppliers, partners and vendors that you are creditworthy. Try to pay your bills on time, and talk to your suppliers if you will have trouble making a payment. They may be willing to work with you by offering discounts or extensions. – Ryan Rosett, Credibly
5. Contact creditors early.
With COVID-19, most lenders have guidelines to recast or defer up to three payments simply by borrowers submitting a request. Communicate with lenders early and inquire about ways they can help you work through the challenging times. In contrast, if you wait until dark clouds settle in, it may be too late to construct a workaround. – Matt Scott, 7xCapital.com
6. Always meet your promises.
Your vendors are probably as hard hit as you are, and they probably have a lot of customers that are in bad shape. Reach out and let them know how you are doing. If you need payment terms, ask for them, and be clear about how and when you can get back to normal terms. Above all else, make sure you meet the terms of the new agreement. Don’t miss a payment or you’ll lose all trust and risk being cut off. – Aaron Spool, Eventus Advisory Group, LLC
7. Keep business and personal credit cards separate.
For many small-business owners, business credit is connected to personal credit, which makes it especially important for them to protect their scores. Some business credit cards don’t connect to personal credit, which can be useful for small-business owners who are worried about overextending. – Luz Urrutia, Opportunity Fund
8. Consider the source.
Not all types of credit are equal. The best credit sources give you a level of control over the repayment terms. Since credit equals debt, it’s important to consider how you’ll service the debt over time. Don’t just go for the biggest check—go for funding sources that align with your financial plan. This crisis will pass, and you don’t want to feel the pain for a long time afterward. – Mia Erickson, Whitnell
9. Watch your credit utilization.
Make sure to keep an eye on your credit utilization percentage. Don’t overuse any card or max it out, as that will negatively impact your credit score. It’s better to use multiple cards than overuse one and max it out. – Khurram Chohan, Together CFO
10. Drawdown your open lines of credit.
If you have lines of credit that have not been tapped, it’s possible during a prolonged crisis that a lender could close those open lines of credit. Consider taking all of it down or drawing it and keeping it safe in another account until you need it or the crisis passes. There would be a cost of capital, but that could be a small price to pay to have access to funds you may not otherwise have access to. – Bill Keen, Keen Wealth Advisors
11. Watch for signs of fraud and identity theft.
To protect your credit, you need to be extra vigilant about fraud charges and identity theft. As a rule of thumb, you should always be monitoring your charges and acting immediately if you don’t recognize something. If you are too busy, delegate this task to someone else. Keep in mind it is now more important than ever to prioritize this, as scams spike during a global crisis. – Gabriela Berrospi, Latino Wall Street
12. Understand your cash flow.
If business leaders can understand their cash flow and all of its nuances, they can properly position themselves not only to manage how much credit is needed but also how and when it will be paid back. A detailed understanding of cash flow will also ensure that business leaders can proactively manage issues before they become problems. – Andrew Lyon, Focused Energy
13. Make small payments.
If you’re worried about your credit score, try to make small payments on a regular basis. This shows vendors that you’re alive and well and trying to do the best you can to honor your commitments. Plus, showing you’ve made current payments will help keep your scores up versus making no payments for a couple of months. Regular payments might also keep you off cash on delivery or other credit blocks. – Chris Tierney, Moore Colson CPAs and Advisors
14. Evaluate, then act.
Reliance on credit has always had a negative connotation, but that’s outdated and no longer true. What’s important to remember is don’t panic, and evaluate your options. Review all requirements, including interest rates, any grace periods and other covenants. Minimize spending as much as possible and evaluate your plan for paying charges off in advance of utilizing credit. This will set you up for success. – Kelly Shores, GCubed, Inc.
15. Re-evaluate the risk.
Taking on debt to protect or preserve a business model that survived in market conditions that may never be seen again is a fool’s errand. Be honest: What are the new facts on the ground? What are the real, new unit economics? Does the market really exist as you thought? Deeply re-evaluate the fundamental risk assumptions. The debt must be repaid by someone before the business can be profitable. – Kim Anderson, Longitude Partners, Inc.
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