It is almost paradoxical that a business operating well for years without using credit will be in a less preferable position than one that has been using credit the whole time. Looking at it from this point of view, one might wonder why a frugal company that showed consistent profit would see the better credit deals going to people who have been operating their business by borrowing since its inception. The simple truth is that the person who has been borrowing for years will only get such deals if that person has been paying the credit accounts off during that time. Although both have shown discipline in financial matters, the person who has been borrowing and paying back money has demonstrated that she or he is worthy of being trusted with credit. The person who is taking credit out after years of not using it cannot make such claims.
If you have been operating for a time without using credit and then choose to borrow, the lending institution will consider your application less attractive than the request from someone who has built up a credit profile. The reasons for this are complicated, but at their most basic, it comes down to the fact that someone looking for credit after years of operating without it could be considered a risk. This is due in no small part to the question of why the person or business needs the credit now after years of working without credit. Has the business suddenly hit hard times, and if so, will it be in a position to pay the credit back? Even if this is not the case, the company has not demonstrated credit literacy by taking out loans and paying them back on time, repeatedly. This is something that is taken into account by lending institutions that want to know that their money is safe in the hands of the borrower, and that the borrower has understood credit policies.
All of this being the case, it is understandable that a lender will be cautious about extending credit to someone who has never asked for it before. The new borrower may have avoided credit up to now out of a sense of responsibility, but it is a matter of opinion whether that strategy shows greater responsibility than the borrower who has taken out credit, paid it back, and used loans wisely in order to operate a thriving business. The second person has built up a history of behaving sensibly when offered credit, and as a result, there is reason to believe that that borrower will do so again. Effectively, the second person is a valued repeat customer, while the first-time applicant is certainly a worthwhile customer, but is unfamiliar to the lender.
If you are of a mind to take a company right to the top in terms of what it can earn, where it can diversify, and what kind of services it can offer, it is certainly worth establishing a business credit profile and maintaining it sensibly at all times. You do not need to borrow much money, or ever have a large amount of credit outstanding. What you are seeking to demonstrate is financial reliability, and you can do that without taking big risks. By taking out credit cards, loans, and lines of credit with your suppliers and paying them off in time and in full, you will demonstrate complete reliability.
As American author Mark Twain said, there are only two things certain in life: death and taxes. Because a business can be handed over from one person to the next in the event of death, the only thing certain in business is taxes. Of course, many times in the past, businesses have tried to avoid paying taxes, and this has led to mixed results. Some have gotten away with it, while others are still paying off fines or living with greatly restricted freedom. Realistically, however, you need to be prepared to pay taxes if you are going to run a successful business. Indeed, the more successful your business, the more prominent it becomes and the more likely it is to draw the attention of the Internal Revenue Service (IRS) for an audit.
This, of course, is not a one-way street. Businesses have to pay taxes, for certain, but they can also get money back, and can even write off some of their credit as a business expense and therefore untaxable. The regulations vary from city to city and from state to state. In Texas, for example, the regulations differ very profoundly from the rest of the United States. To find out what taxes your business is liable for, you should visit with a financial adviser.
Taxation and business credit go hand in hand, and it is potentially a better idea to go to the banks supported by the SBA than to a venture capitalist who will look to loan you more money but expect a large stake in your business. For people who simply wish to run their business to the best of their ability, the latter is far more hassle than it is worth.
As the course so far has highlighted, the occasional use of business credit is largely unavoidable if you wish to grow your business to the ideal level. It is even a good thing to use business credit if you could get by without it, simply to build up a good credit record with the banks and credit bureaus. Any business that succeeds, grows, and sees its way through troubled times without any recourse to business credit deserves applause because it is far from easy, and even unusual in this day and age, to have success of that kind.
There are drawbacks to taking out business credit, and there always will be. By their very nature, businesses are cyclical things. At some times, you will have more money coming in than you normally would have. At others, the money dries up and you will find it hard to meet the payments on your credit agreements. The important thing to remember is to keep your attention on doing things correctly.
Perhaps more importantly to some, the venture capitalist will want a cut of the profits. After you have done all of the work and tried so hard to make your business successful, to just fork over the money to someone else is never what you want to do.
The biggest, most obvious pitfall is the easiest to deal with if you maintain composure and good sense, and that is the realization that you are indebted to someone for at least the early stages of your business life. Until you are working debt-free, you will always be working to serve not only your own interests but also those of your creditors. If things do not go well in the early days, you will find that you are seeing very little of the profit that your company is making, as it will mostly go toward paying creditors, staff, and utility bills. It is not an ideal situation, but if you retain your composure and commit yourself to making the best of things, you should still be able to make your business successful.
- How to Build a Credit Identity for a Business
- Credit Checks for Businesses
- How to Develop a Business Credit Record
- Steps to Ensure Business Credit Approval
- How to Recognize and Remove Personal Financial Commitments when Establishing Your Business Credit
- Effects of Designing a Process Map on a Collaboration Team
- What Makes Good Business Writing?
- Examining the Statement of Stockholders' Equity in Financial Statements
- How to Write a Professional Business Letter
- Tips for Being More Mindful in the Workplace in Order to Increase Productivity
- Facts and Benefits of Collaboration
- Measurement System Analysis in Six Sigma
- Strategies Prevention and Intervention of Workplace Violence
- How and When to Use Visual Aids to Make an Effective Presentation
- How to File a Workers' Compensation Claim