Generally speaking, small business owners are first and foremost entrepreneurs. More often than not, they became business owners because of their passion, ambition, creativity, and ideas — at least more so than than accounting skills. However, most small business owners will agree that managing their credit, along with their cash flow, is one of their top concerns.
And they’re absolutely right to be concerned about managing their business credit. The Small Business Administration (SBA) gives a few good reasons small businesses should manage credit effectively.
1) To secure financing. Managing credit effectively not only ensures that a small business can get credit, but secures financing with better terms. One of the most common reasons small businesses fail is due to postponed or insufficient credit. For small businesses that have less than an ideal credit rating, the interest rates on both credit cards and interests can be exorbitant; this can make it difficult for a small business owner to manage costs, let alone realize profits.
2) To obtain supplies at reasonable terms. Like lenders, vendors and suppliers evaluate your credit and make decisions about credit extension, including terms, conditions, and rates. Being able to get supplies, equipment, and inventory on the best possible terms, helps to maintain a positive cash flow while freeing up cash for business expansion.
3) To improve cash flow. Establishing a sound credit policy when extending credit to its own customers helps a small business avoid slow paying — or even non-paying customers — which can have a detrimental effect on the business’s cash flow. Knowing your customers’ creditworthiness and keeping track of their record of payments can be a time-consuming process, but one that is nonetheless essential.
4) To protect against business identity theft. Identity theft isn’t just on the rise on a personal nature. Businesses need to be careful too. The SBA estimates that up to 30 percent of all commercial credit losses can be attributed to fraudulent activity. Therefore, it’s one of the most important reasons small businesses should manage credit effectively. By actively watching and managing your credit file for incorrect or fraudulent information, a small business owner can minimize commercial losses due to fraudulent activity.
Having good cash flow and credit management helps you to avoid the dangers of demands for cash from suppliers, employees, or even the IRS before cash you’re owed is collected. Effective cash and credit management is as much a part of a small business cycle as producing and distributing products. Like blood is essential to the human body, cash flow is life blood of a small business
