Keys to Financial Wellness

By Stephen Fournier, President, Central New York Market, KeyBank

When it comes to running a successful business, most people think it’s a simple matter of offering a product or service that customers are willing to spend money on and generating profits. Those who actually run businesses will tell you it’s much more nuanced than that—that if you really want to succeed, you need to have a plan for managing every aspect of your operations, especially your finances.

Having the ability to access needed credit when your business is growing is absolutely critical. Even those not currently using any credit facilities, which includes many startups and early-stage businesses, should be focusing on factors that will affect their ability to obtain financing when the time comes. It should be a part of your business plan, and it should be revisited throughout the stages of your business’s life cycle.

Early-stage positioning

In general, it’s a good idea for everyone to stay on top of their personal credit rating, but if you’re the owner of a small, early-stage business, it’s vitally important, because your personal credit often represents an important early-stage financial resource. Also, every bank will look at an owner’s personal credit history when they consider extending a loan or a line of credit to a business.

Here are three things you can do that will make your business more attractive to lenders.

1. Clean up your credit. Talk with your banker about how you can take it from good to excellent.

2. Take a professional approach to accounting and recordkeeping. Your budgets should be created around financial projections, and your books and recordkeeping should be structured to make it easy to monitor your results against them. You should also complete all required government filings (registrations, corporate tax returns, sales tax returns, payroll tax reports, etc.) on a timely basis.

3. Network with lenders and build a relationship with a bank. When the time comes that you need outside financing, you want your business’s reputation and your personal character to be well established with people who can influence decision makers.

Use your professional support system for guidance. Your accountant, attorney or financial advisor have a lot of connections and knowledge. Don’t be afraid to lean on them. Also consider forming a board of advisors comprised of individuals who have expertise in areas you do not.

Leveraging opportunities for growth

The best way to optimize creditworthiness throughout your business’s life cycle is to do things right from the beginning. But if you’re entering the growth stage and have not taken some of the steps discussed above, don’t despair.

A good strategy to enhance your creditworthiness at this point is to demonstrate that you have developed and are using a solid credit-management plan in your business. You can do this in many ways, such as paying all your bills on time, avoiding overdrafts on your commercial checking account, adopting sound cash-flow management practices and establishing a “rainy day” fund to help navigate fluctuations in business demand.

Educate yourself about the various types of credit and their uses, even if your business has a full-time accountant or chief financial officer. The more the person at the top of the organization appears to have a handle on the company’s finances, the more favorably potential lenders are likely to view your business.

Learn and gain a clear understanding of the difference between long-term and short-term credit. Long-term credit is generally used to finance spending of a more permanent nature, such as a term loan for the purchase of machinery or improvements to a leasehold. Short-term credit usually involves a flexible instrument, such as a business line of credit and is commonly used to finance things like growth of accounts receivable and inventory. When your business is in the growth stage, you are likely to need access to both long- and short-term credit, and knowing how to use both will make you much more successful.

See beyond the numbers

Optimizing credit-worthiness throughout the life cycle of your business requires foresight, planning and diligence, and it’s more than just a numbers game. Yes, good corporate governance, accurate record keeping and a disciplined approach to granting and using
credit are important, but so, too, is the human element. Know the strengths of your team, from your employees to contractors and other key personnel. Understand your audience. You need to be able to demonstrate how you are promoting your products and services through various market channels to drive revenue. And value the people who know and care about your business, including your banker. These people can help you focus on what you need to achieve and how to get there. They will also boost your standing and provide you with an additional source of valuable assistance, even in areas outside your business. Lenders will look upon this favorably, and when lenders look upon your business favorably, you will have the financial backing needed to take your business to new heights.

About the author: Stephen Fournier is president of KeyBank’s Central New York Market. He may be reached at either 315-470-5096 or [email protected].

Tips for boosting your business’s creditworthiness

For many business owners, the prospect of applying for a loan can be a daunting process. But it’s not as
difficult as some may believe, provided you adopt the following strategies that may
make your business as attractive as
possible to lenders:

• Adopt sound practices for how you extend credit to your own customers. Take a three-point approach in making decisions about granting credit to customers or clients. First, determine whether you should offer this customer credit terms at all, or if you should instead require payment on delivery. Second, if you are going to grant credit, carefully consider what terms are appropriate (i.e., 30, 45, or 90 days; interest rate, if applicable). Finally, give careful consideration to the likely impact on your business if this customer should fail to pay.

• Use vendor accounts to boost your credit history. Make sure all bank accounts and credit sources used to pay vendors are in your business’s name.

• Take full advantage of the terms offered by the vendor, but always pay within those terms — especially if late payments trigger penalties or interest.

• Demonstrate sound cash-flow management and risk-management policies and strategies. Managing cash flow means utilizing an effective annual budget on a monthly basis in a way that clearly identifies spending targets and revenue targets. Effective cash management can be a significant opportunity creator, positioning you to seize the advantage when competitors are weak, which will allow you to capture market share from them.

• Develop a risk-management plan that identifies the risks you face, the level of vulnerability each represents to your business and contingency plans to meet them.

• Maximize the value of your existing relationship with your primary banking/lending provider. Explore additional services, products and solutions they might be able to provide you, your business and your employees. Make your banker part of your board of directors or informal panel of advisors. Your banker can provide you
with essential financial guidance regarding critical business decisions. They can also help you keep your personal finances on track.

• Maintain a fluid, dynamic business plan that demonstrates to lenders you know
your market and competition, are positioned to capitalize on growth opportunities and will be able to generate additional cash flow needed to service any debt incurred. If your business has historically shown the ability to meet the increased cash demands of controlled growth, lenders will have confidence in your ability to execute on your current growth plans.