Mistake #5: Why using your line of credit puts your business at risk

Since interest rates are extremely low, most business owners think putting equipment on a line of credit is a good idea....it's simple to do and doesn't appear to entail much risk. However, unless you have plans to pay off your line within the next few months this mindset can drastically affect your ability to expand.
Interest rates are forecasted to rise dramatically in the next few years due to the massive debt our government is in. When you tie up your line of credit you are taking a large gamble on either being able to pay back your line quickly or betting that interest rates won't rise. A more prudent way to fund the growth of your business is to lock in as many fixed payments as possible over as long of a period as possible. Whether it be an equipment lease or loan make sure the payments are fixed to protect your business from rising interest rates. Save your line of credit for emergencies only ie. if your boiler goes out and you need a quick fix.
A perfect example is a client of mine that utilized their line of credit a year ago to purchase $500k in equipment. They used their line since it was the easy thing to do and interest rates were cheap. The problem is that although interest rates are cheap, their bank accelerated the terms on the line of credit making their monthly payment jump from a few thousand a month to over 20k a month. Now they are in a bind, they can't refinance because their ratios are extremely leveraged and they appear to carry too much short term debt.  In addition, their line of credit has a blanket lien on all the company assets so if they end up defaulting they lose their commercial building as well as all of their equipment.

Mistake #4, Your Employees are stealing from you.

If you don't have an understanding and checks/balances in place with your accounts payable, CFO, or anyone else that manages your money you run the risk of massive theft. When times are tough you can't trust your CFO our accountant to do the honorable thing. Many business owners put too much trust in the people they hire...they focus on the growth of their business and become complacent about what their accounting people are doing. For example, I have a client that had his CFO (who had been with him for 5 years), steal over $800k from the company account. They did this over the period of 2 years by mismanaging company accounts, pretending to pay bills, and falsifying invoices. The way the owner found out was when he had a lien from the IRS slapped on the business for not being current on his previous years taxes. He is still liable to the IRS and the court costs to fight the case are too large for him to afford in his current business condition.

No matter the size of your corporation do not think you are insulated from theft within the corporation. The highest risk companies have 20-100 employees. To protect yourself and the health of your business ask your bank about positive pay features and fraud protection. Also, get your business bank statements sent to your house so you can review personally all checks cut over the last month.

Mistake #3 that jeopardizes the growth of your business

The third major mistake business owners make is not managing their Dun and Bradstreet rating properly. Dun and Bradstreet is essentially a corporate credit report that details the strength and payment history of your company. I have dealt with many clients that made the mistake of not checking their report periodically for errors. One mistake on a large account can affect the health of your business for over a year. Common mistakes are large suppliers you are on net terms with making an error and reporting you late. This can result from their accounting department mis-applying a payment and reporting you 30/60/90 days late. Unless you keep up to tabs you will never know until you seek funding...and by then it is typically too late to get the error corrected.

Another common mistake is old tax liens and judgements showing as outstanding. Although these might have been satisfied years ago your company report may never have been updated. It is best to get this taken care of quickly by sending written proof these issues are satisfied. I have had more than one client get declined for funding simply because their lawsuit information was so old they couldn't come up with the proof showing satisfaction.

Top Mistakes Small Business Owners make that damages their ability to expand.

I deal with business owners daily and am amazed at the common misconceptions business owners have. Most owners aren't aware of how their personal credit, business credit, and outstanding lines of credit dramatically effect their business. Since the credit markets are extremely tight, successful owners need to have an understanding of how to make themselves appear bankable to the underwriters and have access to the best funding possible.

Mistake #1. Not managing your business credit cards properly. In most cases, these credit cards report to an owners personal credit and 1 or 2 late payments can have a dramatic effect on your scores. In some cases, owners trust an accounts payable person to manage these bills. The issue arises when the Accountant doesn't pay attention and is late on a payment. If the accountant gets these bills directly the owner is never aware until they seek funding for an aquisition. Company vehicles typically report to personal credit as well so these accounts also need to be closely monitored.

Mistake #2. Thinking that your credit card interest is too high and trying to renegotiate with the credit card issuer by going late on your card on purpose. The mindset here is that if I am late on my card the credit card company will be more likely to lower my interest rate to keep me from defaulting. I had a customer recently who did this on a small 8k in credit card debt, this dropped their credit scores a massive amount, and now any lending institutions consider them too high risk to lend to. Keep in mind, late payments stay on for at least 2 years...trying to save a few bucks short term while jeopardizing the health of your business doesn't make financial sense.

I will be posting additional mistakes over the next few weeks to keep owners better informed about how they can protect themselves.

New Years Resolutions for Small Business

As any business owner knows, it pays to do some goal planning and lay out a strategy for next year. The key is to make the overall goal lofty while laying out intermediate short term goals that need to be taken to succeed. For example, if one of your goals is to pay down 100k in business credit card debt by the end of 2011 then you can tie the overall goal into monthly goals and weekly goals. You would need 10k in extra cash flow monthly, or $2500 weekly, to stay on target. This objective can then be tied into you other facets of your business. For example, if your free cash flow is only $1000 a month then you know that sales need to be increased by "X" amount, or overhead reduce by "X" amount, to make this more obtainable.

As you can see this takes a massive amount of planning to work in all the variables and implement the strategy. Keep in mind, success takes time...whether you hit your goal by the end of 2011 or mid 2012 is still considered success...as long as you stay committed to the overall objective.

Small business advice for investing your extra cash in a low interest rate environment

As a business owner, there are limited options to invest your cash safely and get a decent return. It is not like it was a few years ago where putting your money in a savings account or money market account would give you 3% or more annually. If you have unused space for your business, buying in bulk to achieve discounted pricing might give you a decent return. Consider the fact that even saving 5% on bulk adds up. Another option is to stockpile raw materials you commonly use in manufacturing...since commodities are forecasted for further rise in 2011 locking in pricing or hedging your future costs may increase your bottom line and make you more competitive in the future.

As always your best option may be to pay off credit cards and line of credit debt. Although not considered an "investment" lowering these debts make you appear bankable, save you monthly, and allow you a cushion to access if you need cash quickly

How to be productive as a business over the holidays

Many businesses experience a slow down over the next 2 weeks as employees and employers take time off. Since many of your clients are slow as well this can be a great time to pay attention to productive tasks you wouldn't normally have time for during a day to day operation.
- One of the most productive tasks is to personally call your most important clients and wish them a safe holiday and productive new year. Don't use this opportunity as an effort to sell them...simply to say personally wish them a happy holiday. You can also send them a holiday card or quick e-mail.
- Use this downtime to do some strategic planning for next year. Further analyze your business model and make definitive goals for what you want to accomplish in 2011. Whether it be on the revenue side, bottom line income, or landing new accounts.
- Re-organize your office, clean up the clutter and allow yourself a fresh start to 2011.
- Start gathering important tax information together for both personal and business. An early start during this downtime will leave you more time during your busy months to keep focused on what earns your company income.
- Re-evaluate your marketing efforts, what sort of return are you getting on what you spend? If you aren't satisfied with your results take some time to start considering other options.
- Most importantly, re-charge, spend time with your family and allow time for yourself. This allows you to re-engage and be productive after the 1st rather than having a regretfully holiday hangover of "I wish I would have more time off"