Summary:

• Strong credit is crucial for businesses to succeed in today’s competitive landscape.
• Here are five tips to help you get smart about credit.

Strong business credit paves the way for sustainable growth and resilience. It opens doors to favorable loan terms, lower interest rates and higher credit limits – all of which are essential for managing cash flow, investing in new opportunities and growing. It also improves supplier relationships, offers financial flexibility for expansion and provides a safety net during economic downturns.

Navigating the landscape to achieve and sustain solid footing can be challenging. Here are five tips to help you get smart about credit.

Tip #1: Pay Attention to the Basics

While they may seem obvious, upholding the basic building blocks of a strong foundation can bring many benefits.

• A good starting point is to separate your personal and business finances and make them each easy to track. Establishing a business bank account to then apply for credit can set up a credit profile for your business and protect your personal credit.
• Secondly, pay bills on time. Timely payments demonstrate reliability and financial responsibility, which lenders and suppliers look for when assessing creditworthiness.
• Additionally, schedule time to regularly review business credit reports as well as personal credit reports since your personal credit is a major factor in obtaining business credit. This is vital for identifying inaccuracies and addressing them promptly, as errors can negatively impact a credit score. An easy way to stay informed is by subscribing to credit monitoring services that provide real-time updates.
• Lastly, maintain organized financial records. Accurate bookkeeping ensures transactions are tracked and can be easily reviewed, which is essential for internal management and external audits. This will also be beneficial when starting the process to apply for a loan.

Tip #2: Do Your Research

Business owners often expect the process to obtain a business loan will be straightforward and are surprised when they learn they may not qualify. Unlike personal loans, business loans have distinct qualifications and require documentation that can be complex – meaning doing your research can be helpful to getting a loan.

• Start by exploring the various loan products and services available, as banks have different offerings and qualification criteria. Some banks offer scored loan programs, which are simplified versions of credit underwriting, while others can help navigate Small Business Administration (SBA) loans, which offer flexible criteria and lower risk.
• Additionally, be prepared for comprehensive evaluations, such as cash flow analysis or global cash flow assessments, which may require multiple years of tax returns, financial statements and balance sheets.
• It’s crucial to match the right product with individual needs and understand what records are required to qualify. The SBA has a free online resource that explores different types of loans, including qualification guides and comparison tools. Financial advisors, accountants and your banker can also provide recommendations based on your financial situation.

Tip #3: Borrow Wisely

It’s true, there can be too much of a good thing. While it may seem advantageous to secure as much credit as possible to reinvest in your business, it should be balanced with what you can realistically repay.

Overextending credit can lead to significant financial strain, especially if anticipated growth doesn’t materialize, the economy takes a downturn or input costs rise unexpectedly. In these scenarios, businesses are still responsible for repaying their debt, making it essential to carefully assess credit needs and ensure borrowed funds can be repaid comfortably, even in unfavorable conditions.

To find this balance:

• Before requesting a loan, create detailed financial projections that account for different scenarios.
• After securing the loan, regularly review cash flow statements and maintain a buffer for unexpected expenses.

By setting realistic borrowing limits and prioritizing debt repayment, businesses can maintain a healthy credit profile and safeguard against potential financial challenges.

Tip #4: Maintain a Low Credit Utilization Ratio

Managing credit utilization is like managing fuel in a car – if you constantly drive with a near-empty tank, you risk not getting where you need to go creating other stressors. If a business regularly maxes out its available credit, it risks not being able to secure additional credit when it’s needed.

While every business is different, a good rule of thumb is to keep credit utilization below 30%. So, for example if a business has $100 available, it should generally spend no more than $30. This helps maintain a healthy credit score and shows lenders the business can manage credit responsibly and is not overly reliant on borrowed funds.

The best way to maintain a low utilization ratio is to pay credit card statements in full each month to avoid carrying a high balance and incurring interest. Businesses can also apply for a higher credit limit: while this will increase total credit available, maintaining or minimally increasing expenses is essential to preserve a favorable ratio. Additionally, there are alternative financing models that can help increase access to credit, such as lines of credit, but it’s best to speak with a financial advisor or banker to understand what works for your business.

Tip #5: Leverage All Available Resources

Navigating credit, loans and financing can be challenging, but you don’t have to do it alone.

Establishing a ‘kitchen cabinet’ of trusted experts early on – such as a CPA, attorney, and banker – can provide invaluable counsel on the start-up structure and long-term sustainability of your business. Meeting with these experts quarterly or even annually will help you to anticipate challenges, be proactive and make informed decisions while navigating financial and legal realities.

There are also many resources available for businesses looking to better understand and manage their credit. For example, the SBA’s online business guide covers everything from planning to growing a business. The SBA’s network of Small Business Development Centers (SBDCs) also offers counseling and training, such as the New Hampshire SBDC which provides confidential business assistance and free or low-cost educational training programs. Similarly, Eastern Financial Academy provides self-help resources to enhance financial skills as does the FDIC’s Money Smart financial education program which includes a module on demystifying strong business credit.

Lastly, in-person engagements are valuable opportunities for networking and access to expert advice. For example, local chambers of commerce often host workshops on financial management and credit building, where business owners can learn and ask questions. These events and programs like Equity Alliance for Business also provide the opportunity to connect with other businesses that can offer advice based on their experiences and how they navigated different challenges.

Strong credit is essential for long-term success and resilience. And by implementing these tips, businesses can be on a solid path for creating and sustaining healthy credit with confidence.

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The Business Banking Team at Eastern Bank can be a resource as you set up your business for strong credit and additional success. Contact a banker here.

The opinions expressed herein are those of the authors and do not necessarily reflect those of Eastern Bankshares, Inc., Eastern Bank, or any affiliated entities. Views and opinions expressed are current as of the date appearing on this material; all views and opinions herein are subject to change without notice. These views and opinions should not be construed as any specific recommendation. This material is for your private information and we are not soliciting any action based on it. The information in this content has been obtained from sources believed to be reliable but its accuracy is not guaranteed. There is neither representation nor warranty as to the accuracy of, nor liability for any decisions made based on such information.

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