Small business owners start out with a limited amount of knowledge about their endeavors. A lot of things an entrepreneur learns is based on experience. Until a someone has actually sat in the all-important desk of a small business owner, a lot of little things end up being ignored or left unknown. One such thing is credit. More specifically, newbie small business owners may be totally unaware of how credit impacts the value of a business.
Valuation is Valuable
Valuation is definitely important. The value of a business defines how much the business can be sold for. A common exit strategy for any business — small or large — is to sell the enterprise at a profit. Sometimes, sadly, a business has to be sold because the company is underperforming. Regardless of the reason for selling, bumping up the value of a business is vitally important. Building up credit helps with such a goal. As such, improving the credit standing of a business should come a priority for all entrepreneurs.
Business Credit Examined
Business credit refers to credit taken out in the name of a business and not an individual. Individuals acquire personal credit and must maintain a good personal credit score. The range of a personal credit score runs up to 850. A business credit score follows a simpler scale: 0 – 100.
Credit taken out in a business’ name has to be treated with the same level of seriousness as personal credit. Maintaining the highest possible business credit score is critical for boosting a company’s value in the market.
The Transfer of Worthiness
Although the human who runs the business applies for credit, the business holds the credit. When the business is sold, the business retains its outstanding credit score. Anyone interested in purchasing the business also procures the existing credit score. Consider this an asset to the business, an asset that drives up the value of the business at least in part.
Removing Impediments to Business Operations
Business credit does something very important long before any decisions are made to sell a company. The credit allows the business to procure the things needed to actually run things. Cash flow might not be consistent at all times. A lack of cash can be tempered by access to credit. A business would not need to run at “half mast” due to the inability to pay for necessary items. Of course, the debt does have to be paid back. As long as the interest rates on the business credit account are fair, repayment should not be too difficult.
Since the business is running at a proper operational level, it won’t be losing customers unnecessarily. This alone should assist with building up the value of a business.
Caring for the Business Credit Line
As would be the case with a personal line of credit, a business credit line does need to be used correctly. Being loaded with debt is not exactly going to be helpful for a business. Proper management of a business credit line makes running the business easier, avoids costly mistakes, and ensures the value of the business is not needlessly undermined.
Business credit should not be a confusing topic. Understanding a few simple points definitely aids in managing business credit wisely. The end result of this may be a business with a much higher valuation.