What story does your business credit tell? Is it one about a business primed for growth and ready to storm the castle, or is it a story about a business in need of more troops and better equipment to grow to new heights?
Medieval references aside, business credit can affect your company's growth on numerous levels.
Jump Start Your Business Credit With AP/AR reviews
Why would you want to establish credit terms when paying an invoice outright seems like the simpler solution?
Levar Haffoney of Fayonne Advisors, a financial firm advising businesses in the healthcare sector, sees clients missing out on cost-saving and valuable business credit-building opportunities when they pass up the chance to negotiate credit terms with their vendors.
"Not only do some vendors report to credit bureaus, but clients can negotiate better payment terms, including higher credit limits and lower interest rates, once they establish a consistent payment history," says Haffoney.
Without managing your accounts payable (AP) and accounts receivable (AR), you could be missing out on opportunities to increase your purchasing power and ultimately, strengthen your bottom line.
“Strict management of AP and AR can, over time, increase the business' ability to make purchases," says Scott Roelofs (CFA, ABV), owner of RCG Valuation and Monetization, a tax and financial advisory firm specializing in small to mid-sized businesses.
“For example, if the people you owe require a 30-day payment and the people who owe you are paying in 30 days, no leverage is needed," Roelofs says. "Now, assume that through strict management, your business has been able to negotiate a 90-day payment with your suppliers, while also being able to collect from clients within 20 days.
Identify which purchases made with credit directly increase profit and which ones do not. [Then] set a plan to reduce that balance and eliminate the additional purchases that do not directly benefit the business.
—Scott Roelofs, owner, RCG Valuation and Monetization
"This means that your business only needs to make four payments per year, yet your clients are paying you 18 times a year," he continues. "This positive cash conversion allows lenders to offer more credit and suppliers more favorable terms."
Once you assess your AP and AR controls, you can set systems in place to help you take advantage of the financial opportunities for business growth in the year ahead with your revamped business credit strategy.
What's on the Horizon
Here's where the story about your business credit gets interesting: near-term opportunities. Both Haffoney and Roelofs have their eye on specific economic trends for their growth-minded clients in the coming year—that is, after they've squared-away their AP and AR controls.
Rising interest rates have Haffoney excited. It means clients can look for ways to acquire what they need for growth now and lock in lower terms.
“Businesses can take advantage of both promotional and fixed-rate terms that traditional and specialty lenders are offering due to the hawkish monetary policy," he says.
What does this mean for your business?
First, have a look at areas of your business where you need to acquire something to fuel your business growth. Then, explore what terms you can get for financing those acquisitions based on your business credit. You might find that you can make that equipment purchase, increase in your headcount or even boost inventory at a cost lower than you anticipated.
Roelofs is particularly excited about the opportunity for his clients to favorably add extra inventory due to potentially lower raw material costs.
“Inventory is one of the largest costs and least managed assets in small businesses," he says. “Take a raw materials cost that goes from $100 to $50 and back to $100. An up-front purchaser would pay an average cost of $100 by buying all the materials in the beginning. A level purchaser would have an average cost of $82.50. But an opportunistic purchaser would have an average cost of $75 if they doubled their orders at the $50 level."
If your growth strategy could benefit from an inventory increase, be on the lookout for opportunities to become an opportunistic purchaser through your use of business credit.
By leveraging your credit to take advantage of materials that become markedly less expensive as the economy and markets fluctuate, you can position yourself to increase profit margins that would be missed out on by the level or up-front purchaser. While this means an eagle eye on economic trends, your growth goals deserve a little extra attention, especially in fluctuating financial markets.
Final Tips for Revamping Your Use of Business Credit
Now, your business credit story is one filled with negotiations, favorable terms and an ability to capitalize on favorable market conditions. What advice do these experts have to help you fine-tune your finances and keep fueling business growth through strategic leverage?
Roelofs wants businesses to make sure their use of credit affords the company the ability to turn a profit.
"The business should identify which purchases made with credit directly increase profit and which ones do not," he says. “Once the spending has been identified, set a plan to reduce that balance and eliminate the additional purchases that do not directly benefit the business. Over time this will free up both cost and available credit, helping to reduce the liquidity risk of the business."
Haffoney wants businesses to get wise with their use of business credit and keep it in check year-round.
“I'd advise business owners to manage their credit as prudently as they manage their cash flow," Haffoney advises.
"By keeping your financed expenses low and paying on time, owners will build a track record as a responsible borrower," he continues. "I'd also suggest checking your business credit profile for accuracy with Dun & Bradstreet, Equifax, and Experian and proactively correcting any mistakes."
After all, you don't want your business credit story to end with an unexpected yet avoidable hitch foiling your plans to storm the castle. Strategic use of business credit can help you acquire what you need to equip your troops and serve your customers, while helping your company become the better version of itself you always envisioned it being—at a reasonable, well-managed cost.
And that can make for a happier ending.
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