NFIB

Build Your Credit Rating While Cash Flow Is Strong
05/ 21/ 2002

As the old saying goes, banks always want to lend money to a company that doesn't need it. Small businesses can use this to their advantage by taking out loans when cash flow is steady and in the process build credit for the times when cash flow is spotty. Jeffrey Moses explains in today's Workshop.

When your company's cash flow is on a roll, consider taking out small loans from your bank and making steady, consistent payments until the loans are fully paid back. These loans can be for anywhere from 90 to 180 days. The important thing is to make your payments regularly to build your credit rating.

It may seem like a good idea to pay the loan back quickly, making a large lump-sum payment after a few weeks or a month. But banks like to see steady, consistent payments of principal and interest. That's how they make their money, and such steadiness reflects well on your company. When you have a series of successfully paid-back loans on your banking history, your credit rating will be solid. If your cash flow ever becomes a little soft, you'll be in a much stronger position to qualify for a loan.

It's often difficult for a small company to justify taking out loans when they're not needed. Interest paid can eat into profit. But these interest payments can be considered an investment similar to insurance. It can pay off in the future.

Banks make a distinction between "cash flow shortage" and "non-profitability." If your company has cash receivables outstanding, but slow payments are disrupting cash flow, a good credit history will facilitate securing a loan to get you through. If you're having profitability problems, however, a strong credit history is helpful, but is not the be-all, end-all when it comes to securing financing.

Banks make loans based on the Five C's: Character, Collateral, Cash Flow, Capacity and Credit. Each of these can be worked on before a loan is needed. When setting up your account, ask to meet some of the officers of the bank. Get some "face-time" with them, and discuss your business and future plans. In ways, this can be almost as important as establishing credit, because loans to small businesses are almost always based on how the bank perceives the owner.

Establishing both solid character and credit ratings with your banker will improve your ability to secure funding if cash flow should ever become weak.

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