For most businesses, credit is a good option to help improve cash flow and manage working capital. Credit provides an entrepreneur with extra time to make payments and help enhance cash flow into the business. However, you don't want to rely on credit to support your business. It's also very risky to use credit and accumulate too much debt. It's difficult enough to tackle debt with a traditional paycheck, but it can become even riskier when you run a gig business that operates on variable income.
To achieve the best money management strategy, here are some ways to use credit wisely as a gig business:
1. Choose business charge or credit cards with perks that match your gig business.
Today's business card environment offers a lot of great options for credit that can benefit your company. For example, if you drive with a rideshare company, get a charge or credit card that gives you gas rebates, helping you get more mileage from your gig revenue.
If you have a drop ship business, think about using a card that gives you cash back or extends the repayment period. That way, you have more time to pay off the balance while you wait for vendor payments.
Your gig business may require you to travel frequently to meet with clients or participate in events or conferences. That's when it makes sense to get a business card with travel rewards. Then you'll be able to earn airline and hotel rewards that will help lower your travel expenses.
2. Identify a monthly maximum amount of credit.
To ensure you can manage the credit you are using, it's important to only spend what you know you can pay back in the following month. With that and an average monthly revenue amount in mind, designate a maximum amount you will spend. To help you figure out that amount, consult financial software to review a year or more of your revenue.
Of course, many business cards provide a much larger credit line than you should spend. The best approach is to forget that credit card limit, especially if it's a high one, and focus on the one you've made for yourself. Take note of your average income as you factor in how much you can safely spend. This way, you don't spend too much one month and then don't have enough money for the next month if income drops.
3. Know what you plan to put on credit.
When you determine your monthly maximum to spend, take into consideration what you will put on credit. For example, you might decide to use it for recurring subscriptions and expenses like phone chargers, fuel or office supplies. Look at your business budget and average cash flow to see what you can put on your business cards each month to provide yourself with an extra 30 days to pay.
4. Don't carry a balance if you can avoid it.
When you do give yourself a credit maximum, you're taking steps to ensure that you pay off the balance each month. This credit strategy also helps you contend with any unexpected drops in gig income. It also prevents you from having to cover the interest charges that can increase business expenses.
This payoff method may not be possible every month, especially with unforeseen circumstances. Also, there may be months that your income has grown and you decide to use the credit for a bigger-ticket item that will help the business.
To ensure you can manage the credit you are using, it's important to only spend what you know you can pay back in the following month. With that and an average monthly revenue amount in mind, designate a maximum amount you will spend.
If that's the case, develop a payoff strategy that will reduce the number of months you carry a balance to minimize those interest payments. Or, if you need to seek a larger amount for your working capital, it might be better to seek another type of funding source that gives you a lower interest and longer repayment terms.
5. Don't take out too much credit.
Minimize the number of business credit accounts that you have as a gig-based business. It's better to maintain a lean operation with a smaller budget than to extend your budget through greater credit access.
Having a couple of credit accounts will allow you to tap into the benefits of this additional money. Making on-time payments can help improve your credit score and worthiness. Exercising these strategies will also help you maintain a good money mindset as you manage cash flow.
6. Regularly check your business and personal credit scores.
Once you start using credit to manage your working capital, your business and personal credit scores will change depending on how you use the credit. If you regularly use the credit and pay it off in a timely fashion, your scores can improve. Yet, if you make late payments, your scores will go down. It's important to start regularly reviewing these credit scores and accompanying reports to ensure they are correct and don't adversely impact future credit needs. As you think about growing your business, it's important for investors to see that you have a handle on your spending.
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