Common Reasons Small Business Owners Develop Bad Credit

Small business owners have to juggle a lot of different tasks while operating a business. Inventory control and regulation, shrewd management of the daily finances, and taking every step to grow a business and avoid stagnation are some of the key undertakings involved when building a company. With all of these demands placed upon them, it’s no wonder that situations develop that can absolutely destroy a business owner’s credit. Here are three of the most common reasons small business owners get into credit trouble and some basic advice to help avoid bad business credit.

Poor Inventory Management and Control

Ordering inventory for most small businesses amounts to taking a guess about how much stock is required. On the one side an owner has to have ample stock to meet customer demand, and on the other side there are inventory budget management issues that do not allow for excessive inventory. The guess is an educated one based on sales projections and previous customer demand for the product in question; but it is still a guess.

There is also a long list of products required to operate any business. This increases the guesswork and also the likelihood of over ordering. Any single mistake along the way can ruin a business owner’s credit because of a few missed or late payments to a supplier or creditor. A prudent way to avoid this mistake is to understand your inventory requirements through complex analysis and reporting methods and make purchasing projections in a very conservative way.

Inventory problems can arise for more reasons than faulty projections. Shrinkage or loss is a common occurrence with inventory management and control. Theft or damaged goods makes them unsellable. Purchasing inventory with a reduced shelf life can also result in lost inventory. Any of these types of losses can make it impossible for the business owner to recuperate inventory costs and pay back what is owed.

In order to avoid this, many small business owners take steps to counter these types of losses. Educating employees on product care can significantly reduce damaged inventory. Enhanced security efforts with both employee training and digital equipment can also have a measurable effect on the bottom line. By taking efforts to limit damaged or stolen goods a business owner is more likely to make timely payments to creditors.

Failure to Watch the Little Details

Small expenditures can add up before a business owner realizes what is happening. Office supplies, signage, supplies to clean business facilities and dozens of other small costs pile up on an owner’s credit card. When the bills arrive in bulk the business owner may not be able to make even the minimum payment. This is a recipe for bad credit. To prevent this from happening business owners need to keep careful records of all spending so that there will be no surprises. Also, as small expenses can pile up quickly any business owner should minimize cost and maximize usage or output from even the most mundane expenses.

Expanding Too Rapidly

Some business owners are in too much of a rush to be large and extremely profitable. While these are admirable goals, they can get the owner into financial hot water. Moving into a larger retail space too soon or branching out into countless products or services can strain a business’ bank account. As bills come due and the owner cannot pay on time, their credit rating will suffer.

As growth is paramount to any small business, pacing that growth is equally critical to long term success. Expanding is a long process that should be well thought out and strategically planned. A business owner should focus on expanding into one product or area at a time and only move into the next phase when all existing products or services are operating at the maximum potential possible.

There are many reasons why bad credit can occur with a business owner and these are just some of the most common scenarios. For those business owners hoping to keep their credit rating stellar and their business growing, slow growth, attention to detail, and careful inventory control are critical areas to manage effectively. For resources to assist business owners with bad credit see “How to Repair Your Credit” and “Bad Credit Small Business Loans“.