Business credit risk management during recession
There comes a time for every business where they need to use business credit to flourish. However, during a time of recession, it becomes even more crucial to carefully look through and manage a business line of credit.
The way business credit management is done during a recession can have a significant impact on the business’s ability to borrow credit, retain it and also build a credit score.
This is because no institution would readily lend to a business without a good score. Hence, the way your company does business credit risk management will definitely affect your company's position after the economic slowdown.
A business credit profile is the credit face a company presents to its suppliers, lenders, banks, insurance companies, etc., for them to decide whether the business is suitable and eligible for extending credit or maintaining a professional relationship or not.
A company’s credit profile helps in determining the credit amount, interest payment frequency, insurance premium limits, and a few other conditions.
Hence, having an updated business credit profile should be the utmost priority of any business. Everything from payment history and credit history length to tiny details like phone number, address, etc. everything should be spot-on accurate.
Always be careful of the level to which your business uses debt to finance its functioning. The debt financing ratio should be low, and it is important to remain as such because it affects your company’s credit profile.
If the ratio is high, it will display that you don’t have a proper financial management system — that every time your business doesn’t perform well, you fund it through credit, which is not such a pretty picture.
A lower debt financing ratio will show the lenders and suppliers that you have everything under control in terms of finances, and credit has only been borrowed during extremely harsh times.
During the initial foundation years of a business, it can be difficult for business owners to maintain separate accounts. However, the practice of using a business account for getting credit and business credit management is a good practice.
Keeping private expenses separate will help your personal expenses be in check because the kind of large expenses which go into a business can cause a lot of personal damage if you don’t have a distinct business account
Even if you are able to manage both in the same account, personal credit will not help you build a business credit profile, which will make future credit access harder.
Make sure that you keep track of everything in terms of business credit.
The amount of credit you have borrowed from different institutions, the interest rates of all different borrowings, the late payment charges, interest payment dates, your line of credit extended, and how much is left.
Keeping regular track of all these things will help you be on top of your finances and have a clear picture of how your business and performing and what changes need to be made in order to do better.
Plus, you won’t have to bear the costs and burden of late payments and a bad credit profile.
A good vendor-business relationship can go a long way. Once your vendors know that you are an “on-time payment” business, they would easily agree to lend you some money or give you a few days off on the payment dates.
Good vendor reviews will also reflect excellently in your credit profile, as these are actual proofs of your repayment frequency.
You cannot just randomly fund your business through any sort of credit line; you need to be sure of choosing the right and feasible financing option.
Choose a credit line that is affordable for your business, the interest rates are within the payment capacity, and the business’s annual income must be enough to repay the credit.
This is a prominent management practice. However, a lot of businesses fail to abide by it.
The crucial step to do this is to actually collect accurate data on your business spending and analyze it to figure out the areas which are unnecessarily consuming too much cost. Then plan a way to make amends and cut down costs in those areas.
This way, you are constantly cutting down loose ends and also making sure that your credit requirements stay to the minimum.
During a recession, it is business 101 not to make any big purchases. If you make any big spending during the recession time, you would actually be making wasteful spending.
At that point in time, your business would lack the liquidity required to run a business, which would then lead to getting into a huge debt.
It is better to make big purchases once the market becomes stable than get stuck in a trap of unrepayable credit.
You cannot just run a business with an office and employees. Every business needs technology and advanced tools. Your business’s financial stack needs to be updated according to your business requirements.
You need to have an all-in-one financial management platform that would help you track all expenses, directly integrate those transactions with an accounting system, facilitate corporate cards at minimal or no cost, have a reimbursement system, and many more features for successfully managing a company’s expenses.
Related read - How to streamline business expense reporting process?
Now that you already know what is needed for managing a business line of credit and what are the feature requirements in a business financial stack, we bring to you the best in the market: Volopay!
It is a platform holistically designed to cater to all business financial management requirements.
Along with the features mentioned, Volopay also offers its customers a business line of credit at extremely minimal costs, supports the lowest remittance international transfers, gives businesses multi-currency digital wallets, has a budget reinforcement algorithm, and excellent accounts payable functioning, and a lot more.