Building Small Business Credit For A New Business

Also: Small Business Credit Enhancements, Starting a Business With Debt and How to Build Business Credit

Business credit is something I have long experience of from both sides; as a credit controller from a business "lender" point of view, and as a small business owner utilising trade credit. Both experiences came in the UK.

If you are planning to start a small business, or already have one, then business financing is sure to cross your mind at some point. If it hasn't, then the chances are you are not quite as business minded as you may think. It is a natural part of business, large or small, and one that you are going to have to deal with.

Why Do I need Small Business Credit?

Small business finances vary greatly, so it is conceivable that you do not actually need any form of credit. In practice, though, whatever your business, the chances are you will find it inconvenient without at least trade credit. Even if you are just working at home on your computer, you will need stationery and consumables, and you will soon be wanting to call up and order replacements. If they ask for cash payment or cheque in advance, it may not be at all convenient. You will almost certainly want 30 day credit and pay on invoice.

When I started a small business in the 1990's, I did actually have no need to borrow money to fund it; the start up financial needs were small. However, I soon had a number of credit accounts going with suppliers.

How does a supplier go about giving business credit? The approach of a supplier to granting a new small business credit facilities will vary, according mostly to the amount of credit involved, and the norm in that particular type of business. Remember, though, you are a customer, and the supplier will almost certainly be willing to take small risks to test you out as a credit customer.

Not everyone is a bad payer, so the supplier will be hoping you are one of the good ones, and will display that by paying on time every months. So, the supplier may grant a small credit facility to you, just to see how you progress. It is possible they will not even tell you what it is, but it will show in their records. Do not be surprised, if you suddenly put in a big order, if the suppler tells you it's over your limit, so can you pay upfront. On the other hand, if things are going well, that credit limit may go up without you knowing, if you are proving to be a trustworthy customer.

Paying in advance for a larger amount is fine, though, as it also helps to build up your financial credibility. If you look after your suppliers from now on in, they will be more and more willing over the months and years to increase your business credit facility with them. So, as your business grows and prospers, the two of you have a good business relationship. That is the ideal, and fully achievable through a slow build up of business credit.

Once you have a good trade credit record, then you may find you can ask the suppliers to act as trade references when you seek credit elsewhere.

What If I Need A Large Amount Of Small Business Finance?

If it is a new small business and you need finance of any significant size, then there are options open to you. To pursue any of them, you will need to put together a business plan. The plan should show projected incomes and expenditure, capital requirements, working capital needs and cash flow forecasts.

The business plan will do two things. First, it will show the potential lender you are serious and have thought through the business prospects properly. Secondly, it will help them to assess the level of risk. Lending is all about risk, so that is what the lender is most interested in, plus, of course, reward.

It may be a temptation to just throw in some highly optimistic and unrealistic figures just to get the finance. That will not help you in any way. The business plan should also be to tell you what your prospects are for the new small business, and the risks to you personally. If you try to kid the lender, you kid yourself. That is not good business practice, and delusion is a common cause of small business failure.

Once you have your business plan there are two main options for you. You can either go to your bank's commercial department, or business department, or you can seek out a business angel. An angel is someone of business background who has capital to spare, and is prepared to risk it on a small business venture.

These two types of lenders have different concepts of risk and reward. The bank is going to be after their reward of the interest payments; while the business angel may be prepared to forego interest for profit share. You therefore may need to think very carefully before choosing which type of lender is best. The business angel may bring more support and experience, but may also want a slice of your success cake.

The business plan is a very good exercise for you, and one you should repeat regularly once the business is up and running, regardless of how you finance it.