9 things to know about business credit

Recent developments in our challenging economy have served to dramatize how credit can be a valuable friend or a dreadful foe. Used sensibly, credit can be a powerful asset in your business life. Use it carelessly and it can become your worst enemy. You may not need to use credit every day, but when you need it, you can’t afford to have the door closed in your face. Here are nine ways to put credit to work for you and your restaurant and not against you.

1. Be aware of your credit report

If your credit score is “good,” it will be easy for you to get credit when you need it. If your score is “bad,” you may find it impossible to get credit from anyone.

If you are operating your restaurant as a sole proprietor or partnership, it isn’t possible to separate your personal credit from your business credit; your score for both will be the same. (To learn more about how your credit score is calculated, see the Federal Trade Commission's information site.)

The three credit reporting agencies (CRAs), Equifax, Experian and TransUnion, are required by law to provide you with a free copy of your credit report once every 12 months at your request. You can order your free report online or by calling 877-322-8228.

No doubt your restaurant is incorporated, so you may want to register with Dun & Bradstreet if you haven’t already done so.  Be sure to use your legal business name. Registration will provide you with a DUNS number. The DUNS number is a unique nine-digit sequence recognized as a universal standard for identifying and keeping track of the over 120 million businesses in the D&B database. There is no fee for this service and a DUNS number will help to establish your credibility with suppliers and vendors. 

2. How to improve your credit score

You can improve your score by:

     • Paying your bills on time. This is the smart way to handle credit. Late or missed payments are a sure way to lower your score and incur hefty late fees and finance charges.

     • Avoid large balances. Outstanding balances larger than about 25 percent of your credit limit are a red flag to financial institutions.

     • Avoid closing out a credit card account and transferring the balance to another card. This can hurt more than it can help. Each time you close an account, you lower your overall credit limit. Thus, your existing debt becomes a larger percentage of your credit limit.

3. Avoid the minimum payment trap

Whenever possible, don’t charge more than you can pay off in full when your monthly credit card bills arrive. When you pay the full balance on your credit card bill each month, you’re taking advantage of an interest-free loan from the card issuer. That’s the smartest way to use a credit card.

If you make only minimum payments on a significant balance, it can take years, sometimes decades, to pay off the full debt. Once you fall into the “minimum payment trap,” it can be difficult if not impossible to dig your way out.

4. Don’t cancel unused credit card accounts all at once

If you have a number of credit card accounts but use only a few of them, it’s best to close out the unused ones. However, be sure to keep the cards that you’ve had the longest and cancel the newest cards. The CRAs like to see a long record of prompt payments. Too many new cards will tend to lower your credit score.

If you have more than one or two unused cards, spread out the cancelations over a period of several months. A rash of card cancelations in quick succession is another red flag for the monitoring agencies.

5. Think twice before opening new credit card accounts

If your restaurant doesn’t already have a long and favorable credit history, opening a new credit line will tend to lower your score. New accounts lower the average age of your accounts. That, in turn, affects your credit score.

6. Consolidating credit card balances is not a cure

You’ve seen the advertisements: “Consolidate all your credit cards debts into one low-payment loan and we’ll negotiate with your creditors to reduce your debt.”

Don’t believe it.

Once you allow yourself to get into unmanageable debt, there’s no easy way out. Debt consolidation may sound like an easy cure, but many professionals and business owners have discovered that so-called debt consolidation led them down the road to an even more burdensome debt load.

“Consolidating debts may be only digging yourself into a deeper hole,” says certified financial planner Brent Neisner of Greenwood Village, CO. “Before you take that step, you should ask yourself how you got into debt trouble. Overspending almost always involves emotional and psychological issues that aren’t going to go away by treating the symptoms.”

How to win at the game

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7. Eliminate preapproved credit card offers from your mailbox

Those preapproved credit offers that find their way into your mailbox represent a temptation for identity thieves who might try to open new credit accounts in your name or the name of your business.

You can opt out by visiting the official Credit Reporting Industry website or by calling 888-567-8688.

8. Be aware of the differences between debit cards and credit cards

While there are many similarities between debit and credit cards, the differences can significantly affect the cash flow in your business.

It’s easier to qualify for a debit card than a credit card. That’s because there’s no credit involved. When you use a debit card, you must already have the money in your business account at the bank. Your purchase is debited to your account electronically as soon as you make your purchase.

Using a debit card is almost like using cash. Unlike writing a check, using a debit card saves you from having to show identification when you conduct a transaction. Having a debit card not only frees you from carrying cash, it will be more readily accepted than checks where you aren’t known.

However, debit cards carry their own set of disadvantages that you need to know about. Unlike credit cards, debit cards give you no grace period for paying your bill. The money is deducted from your account immediately each time you use it.

Keeping your account in balance can be a problem. It’s easy to misplace a receipt and forget to note the transaction in your check register. That can result in overdrawn accounts and financial penalties.

While you get protection from liability due to fraud on both credit card and debit card purchases, debit cards do not offer the same protection as credit cards in the case of defective or unsatisfactory merchandise. With credit cards, you may dispute errors or unauthorized charges and withhold payment until the matter is resolved. This allows you to use the money while the credit card issuer investigates the circumstances. With a debit card, your money is irrevocably spent the moment you complete the transaction.

If you pay off your credit card balances in full each month, the last thing you need is a debit card. You’re now enjoying up to 30 days of free use of someone else’s money. This is “using the float,” the period between the purchase date and when the money is actually withdrawn from your account. In this case, you should congratulate yourself on your financial acumen and hang on to those credit cards. 

9. Never comingle business and personal funds

Not only is mixing your business and personal finances together an open invitation to problems with the Internal Revenue Service, it complicates your recordkeeping and cash flow management. You must maintain separate business bank accounts and make all of your business credit purchases on a separate business credit card.

Some experts compare unwise use of credit to use of drugs: It can offer short-term pleasure in exchange for long-term pain. Once the "credit monster" gets his hooks in you, it can be painfully difficult—and sometimes impossible—to free yourself.

However, credit in itself is not harmful; used skillfully it can be a profitable tool for managing your business affairs. Use the above tips to help make credit one of your business assets, not one of your liabilities.

How to win the credit card game

1. Don’t think of your credit card as a means for obtaining a loan; that’s the most expensive way to borrow money. If you need to borrow, almost any other source will be a smarter choice.

2. Don’t be tempted to use your credit card to finance a lifestyle that you cannot afford. Charge only what you’ll have the cash to pay for when the bill arrives.

3. Set up a system that will ensure paying your credit card bills on time. Most credit card companies impose oppressive penalty fees for late payments, and a record for paying late can seriously damage your credit score.

4. Don’t use your credit card for cash advances. You will be charged interest from the day you take the cash even if you pay the full balance when you get the bill.

5. Less is more when it comes to the use of credit cards. If possible keep only one credit card for business and one for personal use. A pocket full of credit cards can sweep you up in the illusion that you have more money than you actually have and that’s where credit trouble begins.

6. Think twice before using the "convenience" checks that come from some credit card companies. These checks are treated as a cash advance so interest begins to accrue immediately, and the rate on a cash advance is higher than the rate for regular purchases.

Click on the following links to access the three major credit bureaus: Equifax, Experian and Trans Union.