ARDMORE, Pa. — Things go a lot easier when potential lenders, suppliers and partners can decide to take a risk based on a dry cleaning business’ credit history and capability of repaying obligations. With strong business credit, a business can borrow at a lower cost, with more favorable terms. In fact, many small dry cleaners with good business credit have discovered it is possible get loans without an onerous and often embarassing personal guarantee.
Obviously, business credit is quite difficult to get. For any small dry cleaning business owner, navigating the credit and lending world can feel like a vicious Catch-22. Most commercial banks and traditional lenders are reluctant to loosen their purse strings until would-be borrowers have proven themselves with a strong credit history. But it’s difficult to develop that good record when no one will lend in the first place.
TRADE CREDIT
Suppliers often allow their customers a grace period before requiring payment for the goods or services they provide. This is called vendor or trade credit and it permits every dry cleaning business to generate at least some revenue from sales before they have to pay for the supplies, goods or products. Vendor or trade credit is also often easier to obtain than bank credit because it doesn’t require collateral. Unfortunately, trade credit can be quite expensive.
Terms of 2% 10 days, net 30 days (2% discount if paid within 10 days, the net [full] amount due in 30 days) translates into a 36% or 37% annual interest rate if the cash discount is foregone. While trade credit may be appealing to dry cleaning businesses looking to save money, beware when opting to take these discounts.
BUILDING MORE CREDIT
It is important to remember that business credit cannot be built overnight. Everyone should think about the business credit of his or her dry cleaning or laundry operation from day one. Having access to credit can help any business adapt to changing conditions and position itself for success. But what steps can a dry cleaner take to improve the creditworthiness of his or her business?
- Always pay on time. An operation’s ability to repay loans promptly has the greatest impact on its credit score. On-time payments are the most direct way to improve a credit rating.
- Ensure creditors regularly report the operation’s payment history to the credit bureaus. If timely payments to suppliers and lenders are not included in its profile, the dry cleaning business may not get the credit it deserves for paying bills on time. It goes without saying that the credit profile should be monitored at least twice per year to ensure that all vendor payment relationships are included.
- Maintain good personal credit. After all, well-managed personal finances can indirectly impact the business’ creditworthiness. Personal and business credit ratings are separate, however, and do not directly affect one another.
- Contribute to the business’ credit profile. The more information provided to credit bureaus, the more robust its credit profile will be. In addition, wherever possible, choose suppliers and vendors that report their experiences to credit bureaus, which will also help boost the operation’s profile.
As already mentioned, the best place to start building or rebuilding business credit is with suppliers. Many types of suppliers, including major brands, extend lines of credit that give businesses the opportunity to finance purchases and conserve their cash.
In addition to goods and merchandise for resale, a dry cleaning business can obtain products such as office supplies, computers and marketing materials with payment terms ranging from net 30 to net 60 days. Of course, the focus should remain with applying for credit with suppliers that provide products and/or services needed on a regular basis, in order to make regular purchases using the operation’s credit line. By paying invoices on time, every laundry and dry cleaning business can build a credit history and increase the operation’s creditworthiness.
With a strong business credit report, a dry cleaner can stop relying on personal credit to qualify for needed financing. Because creditors, lenders or suppliers can now easily determine the operation’s risk level with a business credit check, qualifying will be a much easier process.
Building business credit can also improve a dry cleaner’s image, protect the owner’s personal credit, limit liability, and increase credit capacity since businesses can obtain 10 to 100 times greater financing than an individual. But the time to think about credit for your laundry or dry cleaning business is now—before it is really needed.
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult a financial adviser for advice regarding your particular situation.
Have a question or comment? E-mail our editor Dave Davis at [email protected].