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Are you planning to start a home-based business? Well, you will be joining millions of other entrepreneurs. At least that is what industry reports show. The Small business Administration (SBA) puts the number at 50% of the total number.
We are talking about a staggering 15 million home-based businesses. In the US, there was a 49% increase in new businesses from Q2 of 2020.
One good tip to finding success as a startup is learning proper credit management. There needs to be strategic borrowing and lending credit to customers.
That is the only way the company can maintain a healthy cash flow. We will share some effective credit management tips in our article below.
1. Track Your Credit Reports
Proper credit management needs you to check your credit at least once every year. But do note, that may not be enough. You may need to get reports more frequently depending on different reasons.
One major reason to do so is applying for financing or loans for your home-based business. It is a good idea to hire credit management service providers to check your credit reports 24/7.
According to Transunion, a 25 point credit score change can impact the type of loan you get. It will also determine the interest rates that may apply in your case.
Credit monitoring can protect you against identity theft. It also allows you to know who is checking your credit report, which happens when you apply for financing.
A good credit score increases your chances of getting loans with good interest rates. When monitoring your credit report check for any inconsistencies or inaccuracies.
If you identify any, report it immediately for quick rectification. Not doing so can cause your credit score to drop. But, it can be difficult to identify the mistakes if you don’t have the necessary knowledge.
Don’t fret though. Some companies offer credit repair services to help repair your credit score. Their work is to identify any errors in the credit report, thus allowing you to take the necessary action. If you’re unsure how to proceed with identifying mistakes, then have professionals take care of it for you. It may cost you a little but it’s a worthwhile investment.
2. Keep Up With Debt Repayments
When starting any business, you need financing. Up to that point, your credit score has been good. So, lenders are willing to give you loans because they know you will pay.
And here is where your downfall begins. The easy access to cash has you borrowing left, right and center. After all, you’re pretty confident that the business will take care of the payments. But, it is a big mistake to bank on income that is not already coming in.
Do note, a key scoring criterion for credit scores is your debt repayment history. The principal is quite simple. Keep up with settling your bills on time and your credit will remain good. Skip or delay payments, and it goes straight to your report. Before you know it, your credit score will be down in the dumps.
Avoid overextending yourself for the business by moderating how much debt you collect. If your credit score decreases due to having too much credit or payment delinquencies, it may be prudent to hire a credit repair company.
3. Know Your Customers
Within the running of the business, you may need to extend credit facilities. But, before you do, take the time to know your customers better. The most crucial aspect is to determine whether they are credit-worthy.
Do they have the ability to pay within a specific period? Asking for such information from the customer may not give you true feedback. No one will self-report a poor repayment history.
So, your due diligence must cover a credit check. You can access such information from any one of the credit reference agencies. The main ones are Equifax, Transunion, and Experian. The bureaus can avail detailed credit reports showing previous payment behavior.
Another good source of information would be trade references. Talking to suppliers, for example, can give you vital information about the customer.
But, there may be bias in the reporting, depending on the relationship they have. You can also ask the customer for a bank reference as part of the due diligence.
4. Establish Credit Control Processes
Credit Management for your home-based business will be easy with proper credit control. Come up with a document that covers the following areas:
- A clear chain of action from when the customer places an order to invoicing and final payment.
- Late payment handling procedures. Such include how you manage communication with the customers. It could be through emails, notifications, or courtesy calls. Penalties like interest on amounts or service withdrawal.
- Terms of credit including how much you give a customer. You may base it on specific criteria such as credit ratings. The document should also highlight the terms including interest and payment period.
- Risk mitigation procedures including client monitoring to detect any issues. Trade credit insurance to ensure invoice settlement and debt recovery measures.
5. Separate Your Personal and Business Credit
A significant, yet common, mistake for startups is combining personal and business finances. So, if the business fails, the impact spreads to the entrepreneur’s personal life. Separate the two and keep it that way.
Developing discipline is crucial. It is easy to dip into business accounts to finance your lifestyle. Yet, the truth is repaying the money is harder than you may think.
Also, you do not want business credit mismanagement to affect your credit score. Establish the business credit history by opening a separate bank account. Use it to take care of any financial transactions related to your company.
Final Thoughts
Credit management for a home-based business is no different from any other business. You want to ensure a consistent cash flow at all times. One of the most critical things to do is watch your business credit score.
Consider it an investment to hire credit management service providers. The professionals provide reports whenever you need them. They will also alert you in case of errors that need correcting.
Credit repair services are available to help you maintain good credit. Other tips we have shared include knowing your customers. Also have clear credit control procedures in place.
Finally, separate business and personal finances. Tax reporting and bookkeeping will be easier. You also protect your personal credit score, in case the business fails.
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