Answer this question:
“What would you do if you had a blank check to write for business expenses?” Buy a new car? Buy new office furniture and equipment? We’ve all been there. You want to spend money on a new marketing and advertising campaign. You want to spend some money to attend a conference or convention. You want to spend some money to hire a coach. You want to spend, but you just don’t have the cash on hand.
Even the most seasoned agents can go through “dry spells” where their cash flow becomes an issue.
Negative cash flow is when revenue drops and you don’t have enough money to pay the bills or you don’t have enough money to help grow your business.
Positive cash flow is when you have enough money to cover everything. The two sides of this coin couldn’t be any more opposite. One is bright and shiny and the other is dark and rusted. Positive cash flow will help the growth of your business, give you the ability to seize opportunities, give you peace of mind, and will lead to increased revenues. Think: “It takes money to make money”. Fact: Image is everything when it comes to real estate. Whether it is networking, social media, or pulling up to a listing appointment, it’s hard to “fake it till you make it” with NO CASH or CREDIT. Negative cash flow usually leads to a decrease in business, stress, missed opportunities, and increased debt. It’s impossible to “keep your eye on the ball” when your mind is buried in debt. Negative cash flow can cause an agent to fail!
The answer to the cash flow problem, isn’t always, “work harder!” or, “work smarter!” We all bust our butts every day, (well at least the ones reading this article do ;)). Agents have to prepare for the “rainy day” now. Agents have to be proactive and set themselves up so they have access to cash and credit when they need it most. The answer to the cash flow problem is not to use your personal credit to keep you afloat. In fact, one of the most important things you can do as an agent is to separate your personal credit from your business credit.
What is business credit?
Business credit is built using your Federal Tax ID Number/Employer Identification Number (EIN). Here are some reasons why business credit is so important:
- Improved credit capacity. According to the SBA, “businesses have 10 to 100 times greater credit capacity compared to personal credit.”
- Increase the value of your company. The thought of selling your company may be the furthest thing from your mind. Here is what you need to remember: the credit score of your business is fully transferable. If you sell the company, the new owner(s) will benefit from the work you put in.
- Protect your personal credit. Early on, you realize that your personal credit may be the only thing you have when applying for loans and credit cards. By establishing and improving your business credit, you can leave your personal credit out of the equation in the future.
“You’re not alone”
Here are a few surprising statistics related to business credit:
- 27% of businesses surveyed by the NSBA claimed that they were not able to receive the funding they needed. For those 1-in-4 businesses, the most frequent primary impact that a lack of funding had was preventing them from growing their business.
- 46% of all small businesses use personal credit cards. Many small businesses fail to separate business and personal expenses, according to research conducted by MasterCard®.
- According to the NSBA Small Business Access to Capital Study, 20% of small business loans are denied due to business credit.
- The Nav American Dream Gap Survey, 2015 revealed of small business owners surveyed, 45% did not know they have a business credit score, 72% did not know where to find information on their business credit score and 82% didn’t know how to interpret their score.
- Many lenders consider a business credit score of 75 as “acceptable” making it harder for those with a lower score to get a small business loan according to Small Business by Demand Media 2015.
- Bolt Insurance stated that one in three small business owners borrow money from family and friends, while 75 percent of young firms’ funds come from bank loans and business credit.
- Mercator Advisory Group research finds that small business credit cards account for $430 billion in spending, or about 1 in every 6 dollars spent on general purpose cards.
Here are the general steps to start building your business credit:
- Don’t be late paying bills! This shouldn’t need to be mentioned, but…it’s very important for your credit.
- Set up an EIN (federal tax ID) number for your business and stop using your social security number.
- Open a bank account just for your business, and stop using personal credit cards and accounts for business expenses.
- Set up a business-only credit card, too.
- Work with a few vendors (at least 4 or 5) to set up a line of credit.
Business credit is the lifeline for a business. It enables you to obtain the capital you need to expand, cover day to day expenses, hire additional staff and allows you to conserve the cash on hand to cover your cost of doing business.
When you take the necessary steps to build business credit, your business will have more financial opportunities. Banks, lenders and suppliers rely on business credit reports to assess the creditworthiness of a company. With strong business credit, you create a safety net for your business so it will be easier gaining access to the business funding you need.