Sunday, May 18, 2008

So what about credit

I had an interesting discussion with a guy I respect very much from the credit industry this week and he gave me some very powerful insight into how we should position our organizations for rough times. One of the things that just does not compute for me is how many small businesses and particular resellers just do not understand the importance of a strong credit relationship. We need to have a very deep relationship with our banker and distribution partner so we have some breathing room to grow. Way too many think credit cards are the answer - and they are the absolute worse answer to this need.

So rule #1 is to establish a banking relationship and build your credit history. Have a line of credit and use it some, making sure to make all payments on time. DO NOT pay things off way early as that does not create a credit history. Pay it when due, but not way early.

Rule #2 is to do the same with a distribution partner. Work to get a line of credit with them and pay on day 29 or 30 if you get net 30 terms. Don't pay on day 31, or day 25, pay right on time EVERY TIME.

Rule #3 is that once you have this established with your key bank and distributor, expand it to others. Get a small line of credit with another bank and also a couple other distributors. This is not in order to spread purchasing and financing but rather to build a broader credit history. Make an occasional purchase from your second and third disty partner and put a little on a credit line at a second bank. Be up front with all this with your main finance partners so they are completely in the loop.

When times get tough, you may face a shrinking credit situation at your primary lendor and disty. Having secondary relationships may be critical for you to continue normal operations in times when the economy is tough. It is too late to do it then. This has to happen when you are doing well and there is time to make it happen.

Do not even think about it if you cannot discipline yourself to pay on time EVERY time. Bad credit builds up just as much, or more so, than good credit. The last thing you want is to create a series of bad credit history postings. But if you are a good money manager, this is an area you can create a very strong competitive advantage against most of your competition as well as position yourself for success in down times. It has to be done when you can absolutely perform, but it can really put you on top when things get tough.

1 comment:

Stuart R. Crawford said...

Arlin, great reminder today on credit, credit cards are not the answer. I have some stories that I can share about what credit cards can do to person when not used properly.

During my "venture away from God" days, I used to my credit cards to live outside my means and give the impression that I was someone I wasn't. I am still repaying this off.

Thank you for the great reminder today.