Most entrepreneurs are looking for ways to grow and expand their businesses, but the economic landscape can be unpredictable. Business credit can go a long way here. When done right, it can unlock much-needed capital, fuel growth and help small business owners take their companies to the next level. Whether it’s a business credit card or a term loan, here are a few key ways to leverage business credit for strategic growth.
Keep your personal finances separate from your business
You may be using personal funds to fuel your business, which is often the case for entrepreneurs who are in startup mode. But relying on personal credit cards to cover regular business expenses can complicate your finances, especially if you’re audited by the IRS and need to substantiate your business expenses.
Using business credit can make it easier to separate your personal finances from work-related spending. With a business credit card, you’ll have a clear record of your business expenses, plus your credit limit will likely be higher than a personal credit card. If your business is structured as a limited liability company (LLC), keeping your work expenses separate from your personal finances can also protect your personal assets if your business is sued.
Improve your business credit
As your business grows, establishing and maintaining a strong business credit score will be essential. It’s usually a requirement to get approved for business loans and other funding options. It can also help you strengthen your relationships with vendors, all while protecting your personal credit health.
Your business credit report will include several business credit scores, along with your payment history. This snapshot can give lenders an accurate idea of how creditworthy your business is. Using business credit responsibly and making on-time payments can help set you up for strong business credit — and that could translate to more favorable rates and terms on future business loans. It can also lead to lower insurance premiums.
Enhance your inventory
New business credit, whether that’s a loan or line of credit, can provide the funds your business needs to grow. That might involve:
- Purchasing new inventory: This can include inventory for new product lines or orders to replenish your existing offerings. The goal is to anticipate your customers’ needs and have the inventory in stock to meet demand. This often plays a big part in customer satisfaction, especially in a crowded marketplace.
- Buying new equipment: If you’ve been holding off on a big equipment purchase, business credit can allow you to move forward more easily. Equipment might include things like machinery, new tech or devices or office supplies. These things can help you streamline your business operations and better serve your customers. This is especially true if you’re investing in equipment that automates tasks that are otherwise time-consuming. You can then devote your time and energy to more worthwhile projects, like scaling your business.
Manage cash flow
Cash flow is the lifeblood of any small business. Not surprisingly, running out of money is the main reason why startups fail, according to data from CB Insights. You can use business credit to cover essential expenses while:
- You’re waiting to receive payment for outstanding invoices.
- You’re experiencing a seasonal slowdown or dip in revenue.
If you’re tapping business credit to cover cash-flow shortages, be sure to have a plan for paying down whatever debt you accumulate. Otherwise, those minimum monthly payments could take a big bite out of your budget. Carrying excessive debt can also hinder your ability to expand the business.
Up your marketing game
Marketing goes hand in hand with sales, but it’s easy to overlook. When done right, marketing can help get the word out about your business, attract new customers and build loyalty among your existing customers. It’s all about brand awareness, which is critical. New business credit can free up funds to elevate your marketing strategy.
According to the U.S. Small Business Administration (SBA), it’s wise to create a clear marketing plan that identifies your:
- Target audience
- Competitive advantage
- Sales plan
- Sales and marketing goals
- Marketing action plan
- Budget
With fresh business credit, you might choose to take out new ads, hire a marketing consultant, partner with an agency or conduct market research.
Expand your team
Finding and onboarding new talent comes at a cost. In fact, bringing on a new employee typically costs 1.25 to 1.4 times their salary, according to the SBA. You can use business credit to optimize your recruitment and retention efforts. That may involve working with a staffing company or hiring someone to handle the task in-house.
Another option is using business credit to cover expenses, then redirecting cash toward expanding your employee benefits. This can help attract high-quality talent and motivate star employees to stick around.
Get over a financial hiccup
Sooner or later, most small business owners learn that emergencies happen — whether it’s a surprise equipment repair or an unexpected tax bill. That could throw a wrench in your regular budget and create a financial emergency if you aren’t prepared. If you’re in a pinch, business credit can provide funding to see you through to the other side.
Ideally, you’ll build a strong emergency fund for your business. One rule of thumb is to set aside 10% of your annual revenue. Others suggest having three months’ worth of business expenses on hand for emergencies. Parking that money in a high-yield emergency fund can allow you to earn interest on that cash — and avoid taking on new debt if you run into a surprise expense.
When used strategically, business credit can be a tool that helps your small business grow and expand. Just be sure you have a plan in place for paying down your debt.