How do the self-employed get credit?
What do I do if you are self-employed and want to get credit?
Start by being well documented. You will never convince a potential creditor that you can handle your finances if you can’t handle your business and personal financial documentation.
Be prepared to show how your budget will accommodate the loan payments and how you will plan for those payments even in the event of a downturn in your income.
You may have to offer some collateral or security to establish your credibility.
Choose a creditor who understands your business. Stick with that creditor if the service is good. And remember…creditors like stability!
Commercial (trade) credit for the small business owner
Wholesalers and manufacturers develop credit management systems for commercial customers that are not applicable to consumers. Commercial customers (businesses) behave differently because they are often ongoing, repeat customers. For example, a consumer will buy flooring for their house perhaps only every five to ten years from a retailer. On the other hand, the floor covering retail store will buy stock for their store several times a month. This kind of commercial credit is often called trade credit.
The retailer’s credit department
Bank credit cards have replaced the retail store’s credit department. The retail store will not worry about setting a credit limit for the consumer, who will use cash, a debit card, or a credit card to pay. The retailer pays a fee to let the credit card company worry about the consumer’s creditworthiness and collecting the money. The credit card company, who will in turn collects from the consumer, pays the retail store, less the fee.
The manufacturer or wholesaler’s credit department
On the other hand, the manufacturer or wholesaler needs to set a credit limit to control the level of exposure it has to the ups and downs of the retail store’s monthly sales. Often, these ups and downs are seasonal, such as in the apparel industry.
Unlike the retailer, the manufacturer or wholesaler does not have a guarantee from the bank. Payment from the retail store is expected usually within thirty days. It is a risk that a manufacturer or wholesaler must accept to make sales to retail stores in a competitive market.
Building and keeping an excellent credit report for yourself and your business will allow you to obtain the best possible terms both for yourself and for your business. Your ability to sell at competitive prices and to preserve cash by using the financing offered by your trade suppliers will add value to your business.
Mike Morley is a Certified Public Accountant who holds the top credit designations in Canada, the US, and the UK. A speaker, consultant and author of several books including “Financial Statement Analysis Simplified”, “The Complete Guide to Credit and Credit Repair for Canadians”, and “Sarbanes-Oxley Simplified.” Mike teaches investors, lenders, small business owners, and prospective buyers of small and medium sized businesses how to make sound investment decisions.
For more information visit: www.mikemorley.com
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