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Credit is an essential tool for small businesses that can help in several ways. From covering costs during a slow season to adding inventory to investing in new growth opportunities, there’s no limit to the ways businesses can leverage credit, focusing on long-term financial success.
According to a 2023 NFIB survey, almost one-third of small businesses have a term loan. Here’s a look at what business owners should know about credit and how to leverage credit to support business goals.
The importance of building business credit
Before we dive into leveraging credit for your small business, it’s crucial to understand how business credit works. In many ways, it’s similar to how your personal credit score works, where keeping balances low and making payments on time (or early) are among the most critical factors. Here are a few ways you can build your business credit score and, in turn, access more credit:
- Make payments on time.
- Review your business credit report regularly.
- Monitor your credit utilization ratio.
- Remove paid loans from your report.
- File disputes for errors quickly.
Keeping your business and personal finances separate can help you build credit for your business and protect your personal finances. Experian and Equifax maintain business credit reports and scores — the same credit bureaus you may recognize from your personal credit scores and reports. They’re also tracked by Dun & Bradstreet, responsible for the DUNS number and score. If you don’t already have one, applying for a DUNS number is an important step in building business credit.
Strategies to optimize credit use
With a healthy business credit profile, you can leverage credit for various purposes. As long as you understand the costs, potential drawbacks, and benefits of using business credit and can afford your monthly payments as scheduled, credit can be a valuable financial tool.
1. Invest in your business.
One of the best ways to use credit is to invest in growing your business. As every business is unique, the way you invest for growth is different from any other business. However, you may consider these general categories for potential investment opportunities.
- Marketing: Marketing is the lifeblood of a business. Marketing fundamentals teach about the four Ps of marketing: product, place, price, and promotion. Investing in a better product and effective promotion can help expand your business reach to new customers while also building customer loyalty and repeat business. Putting thoughtful advertisements in front of your target audience can help you build your sales funnel and long-term growth prospects.
- Inventory: With most business models, you can’t sell something unless you have it in stock. Whether it’s raw goods or retail inventory for resale, those costs can be significant. Instead of dipping into cash reserves, many businesses leverage credit to increase their inventory. Some vendors may want payment up front, making credit cards or lines of credit the preferred option to leverage credit. In other situations, a vendor may sell you inventory on credit, and you pay the vendor back later on. When buying inventory from a vendor on credit, pay close attention to the payment terms. In many cases, you can get a discount for paying early. If you can take advantage, those discounts can be valuable and add up to significant savings over time.
- Equipment: This can include manufacturing tools and machines, cash registers, vehicles, fixtures, computers, and other long-term assets. When you invest in equipment, you’re investing in the potential for higher output and productivity or cost savings compared to current operations. Finding the right balance here is critical to the financial success of your business. While you may always want the latest and greatest technology, overextending your credit can lead to difficulties keeping up with payments. But not investing can also hold you back from growing your revenue. Making thoughtful decisions around equipment investments with credit can lead to the most ideal outcomes.
- Adding new locations: If you operate a brick-and-mortar business, you can leverage credit to open new locations. New locations can bring your company closer to new customers and drive exponential growth. However, opening new locations can also be costly. For example, if you run a restaurant, the costs of new kitchen equipment, seating, and decorations can easily reach $500,000 or more. But just like equipment, mindful investments can lead to a significant long-term payoff. If you can’t afford to open new locations with cash, leveraging credit to expand can be a wise decision.
2. Consider refinancing.
Leveraging improved credit as a small business can also unlock lower borrowing rates. By shopping around, you can reduce the cost per dollar borrowed, freeing up capital for essential business needs like expansion or inventory. As your credit improves, you’ll likely find lower borrowing costs. A decrease in market interest rates, typically following actions by the Federal Reserve, can also help you find lower rates.
Use the Annual Percentage Rate (APR) to compare loans and credit lines. A lower APR means less interest paid over time, which can significantly improve your business’s cash flow and growth potential. But beware of refinancing to a longer payback period for a lower monthly payment, as your interest costs may increase even with lower monthly payments.
3. Negotiate better terms.
Negotiating with creditors can lead to lower interest rates for your small business. Even a slight reduction can result in noticeable savings. Savvy business owners leverage positive payment histories or improved credit scores to reach better terms. Leveraging good credit can positively impact aspects of your business beyond debt management.
Remember, vendors may also be willing to negotiate if you’ve been a consistent customer. Pointing out your business’s good standing can help you secure lower rates. If you are able to pay your vendor consistently ahead of your payment terms, they may be able to offer a discount in exchange, as this helps them better manage cash flow for their own business. This reduction boosts your cash flow, allowing more investment in your business’s expansion and improving profitability.
Key takeaways
How Square can helpSquare can act as a financial partner for your business, with a range of services to help you manage your money. While you may be familiar with Square’s industry-leading payment processing and POS systems, Square also offers banking, credit cards, and business lending to businesses like yours.
Check out the full suite of Square small business offerings to learn how Square can power your entire business to help you reach your business goals.
While business credit may seem daunting, it’s important for savvy business owners to understand. With the right attitude and resources, you can use credit as part of the formula that makes your business thrive.
