There are several ways that you can increase your cash flow as a business owner, and most have to do with increasing your revenue and decreasing your expenses. But did you know your personal credit could have a role in managing cash flow?
Whether you are a startup or you've been around for years, your personal credit can assist you in strengthening and managing cash flow. Here are few ways having good personal credit can help.
1. Access to capital
My previous business was an upscale (read: very expensive) day spa. I started it with solid personal credit and received start up capital from a variety of sources: credit cards, both personal and business cards; two SBA loans, a 504 loan for property and equipment and a 7(a) loan for start up capital; and a home equity loan.
I would not have received any of those without a solid credit score (I was above a 650 from all three bureaus). But in all candor, my personal credit was strong... until the business started.
—Dr. Tiffanie Winfrey, owner, Winfrey Dental Aesthetics
My starting expenses equaled, and at times exceeded, my credit line limits, which immediately reduced my personal credit score. Further, retail businesses can be slow in terms of building up revenue. For me, that meant that my cash flow was nonexistent for a period of time.
The problem was that I did not accurately estimate expenses, and therefore I didn't apply for the adequate amount of credit lines to operate successfully in those early days.
With that in mind, I advise against being conservative when estimating your expenses. Consider borrowing more than you think you will need, especially when you have strong credit.
And remember: Having a business that starts with more expenses than revenue for an extended period of time can negatively impact both personal credit and cash flow.
2. Access to higher lines of credit
Having strong cash reserves in your business can help keep you on strong financial footing. As the saying goes: "Cash is king."
"In 2008, when I first started the business, I did not have great credit. While I was approved for lines, they were too low to adequately operate," says Denita Conway, president of facility and logistics consulting services company Proven Management and 2018 SBA Business of the Year winner for the District of Columbia.
"So one of the things that I had to do is to figure out how I was going to fund that business properly," Conway says. "The first step I took was personal: I started to cut back on unnecessary personal spending [and] tracking just about every dollar. I started looking at things that were unnecessary in my personal portfolio.
"I learned in those early days how important cash reserves were to strengthening our loan application and cash flow," she continues. "Managing cash flow means reducing those expenses and having more cash left over."
At the end of that process, Conway says her credit score improved her ability to receive higher lines of credit that adequately supported the business and the expenses it required.
Latoya Graham is co-owner of Graham Technologies, an IT professional services firm that has operated for 11 years. She and her husband grew their business with cash reserves and by focusing on personal credit.
"Our personal credit played a significant role for us," Graham says. "The bank reviews it to essentially show how responsible you are with debt management.
"We worked hard to keep our personal debt to a minimum," she continues. "If we didn't have the funds in the bank, we didn't spend."
3. Access to better interest rates.
"When I started my dental practice from scratch, I received a business line because there was little income flowing in and of course the bills needed to be paid," says Dr. Tiffanie Winfrey, owner of Winfrey Dental Aesthetics. "But, with solid credit, I qualified for strong and low interest rates, which indirectly helped me in managing cash flow."
My current business Cober Johnson & Romney, a business and legal consulting practice, had quite a different beginning. We had three different partners with varying credit scores. But interest rates were better for me this time around because the lenders took the average of those scores.
Also, a big distinction with this business and my first one was that each partner used credit repair services when necessary so that those credit line applications were successful.
Now that you understanding how important credit scores can be when it comes to managing cash flow, I hope you'll be able to make stronger decisions for the growth of your company.
Read more articles on financing.
Photo: Getty Images
The information contained herein is for generalized informational and educational purposes only and does not constitute investment, financial, tax, legal or other professional advice on any subject matter. THIS IS NOT A SUBSTITUTE FOR PROFESSIONAL BUSINESS ADVICE. Therefore, seek such advice in connection with any specific situation, as necessary. The views and opinions of third parties expressed herein represent the opinion of the author, speaker or participant (as the case may be) and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions. American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any such opinion, advice or statement made herein.