Fixing Business Credit Report Mistakes

Business Credit Report Mistakes Don't Add Up

As a kid, few consequences were more frightening than the threat of having something go on your permanent school record. Any slip-up, large or small, could go on this life-determining record. The prospect of a tainted record was all most of us needed to sit up straight, respect our teachers, and resist the temptation to shoot a spitball at the blackboard.

Your credit report is the adult equivalent to your school record. You even get graded for it. It also has real-life consequences. What happens if your business credit report comes back with mistakes? That’s like having an expulsion on your record that never happened.

Fixing business credit report mistakes isn’t simple,  but it’s not impossible either. Be prepared to make several calls, carefully go through your company’s financial records, and remain vigilant. As challenging as this may seem, it’s worth it in the end. Plus, you can keep an eye on your big picture financial metrics with PayPie.

Finding business credit report mistakes

Before a potential error on your business credit report makes you shake your fist at the sky in anger, check your books. Rule out any possibility that you may have left out important information in your own recordkeeping. Think of it as the “Have you tried turning it off and on again?” step.

You should also ensure that you know what your business credit report covers. Your credit score is a numerical value that distills your company’s record of paying vendors and creditors on time, the amount it debt it owes, the length of your credit history, and any new kinds of credit your business has (loans, lines of credit, credit cards, etc.). Credit reports from Dun & Bradstreet, Equifax, Experian, and TransUnion all provide you with a credit score for your company, as well as a rundown of your business’ credit history.

Request a report from each credit bureau

Business credit scores vary by bureau. Some even include slightly different information on their report than others. Equifax, Experian, and TransUnion all use a scale of 0-100, with 100 being the top possible score. Overall grade assessments will differ depending on the criteria used and how these factors are evaluated. This is why it’s a good idea to request reports from each agency if you suspect there might be a mistake.

Once you have credit reports from each agency, you’ll want to read through them all and see if the information they contain matches up with your business records. If you’re certain that your credit report has a mistake, there are plenty of reasons why that might have happened. Better yet, there are several steps you can take to fix it.

Improving your business credit score — where to start.

Business Credit Report Mistakes Not Right

Common business credit report mistakes

Some business credit report mistakes are more common than others. Most come down to human error. Here are some of the more common mistakes you might find on your credit report and how they got there in the first place.

1. Late payments from seven (or more) years ago

Your credit score should remove late payments if they’re seven years old or older. But this doesn’t always play out as it should. Sometimes, old late payments stay on credit reports long after they should. If this is the case, contact the credit bureau to contest the entry. They will either investigate the entry or simply strike it from your record if the claim is valid.

2. Credit accounts opened under a similar name

Credit bureaus aren’t perfect. Their data is often only as good as what gets reported to them, which means that clerical errors can cause credit report mistakes. If a company with a name similar to yours opens a credit account, there’s a possibility that their information might get mixed up with yours.

3. Closed accounts listed as open

Your creditors should note when you close your account or you finish paying your loan, but mistakes happen. Old credit cards or a closed business line of credit can show up on your current credit report due to clerical errors. This could accidentally signal to credit agencies that you have more credit accounts open than you actually do. In turn, it may suggest that your company is borrowing more than it should. Be sure to look for old credit accounts and loans on your report. Then check with your lenders to make sure they’re no longer open in their system.

4. Paid tax liens from seven (or more) years ago

Old tax liens on your credit report are similar to late payments. They no longer belong on your credit report if you paid them off and they’re seven or more years old. Most agencies will remove lien records once the seven-year mark hits. If you see an old lien on your credit report, reach out the credit bureau and request that they remove it.

5. Inaccurate credit limits or loan amounts

Credit agencies determine your score based in part on the maximum amount you’re approved to borrow (your credit limit), and the actual amount you’re currently borrowing (your loan amount). If this information is incorrect on your credit history, you may appear to be borrowing more money than you should — even if you’re approved for more than the report suggests. Make sure your credit limit information, loan totals, and remaining balance are all correct when you review your credit report.

6. Fraudulent activity linked to your business

Of all the potential sources of credit report mistakes, fraud is the most vexing. Credit fraud is all too common these days, with more than $3.7 trillion lost due to business fraud in 2017. It’s not always easy to keep track of daily cash flow, which can help prevent fraud before it happens.

The differences between business and personal credit.

Who to contact to fix business credit report mistakes

The process by which you fix business credit report mistakes varies depending on the kind of error in question.

When to reach out to vendors first

If your payment history with a vendor is inaccurate, contact the vendor before going to the credit bureau. Credit agencies rely on vendors for payment history information. So start by going to the source. Reach out your contact or someone within the accounts receivable department. This process also helps in clearing up confusion involving a similarly named company appearing on your business credit report.

When to reach out to creditors and lenders first

Give your creditors or lenders a call if your credit limit, payment history, or loan totals look incorrect. Odds are that they may not have updated your business’ profile. The same holds for any closed credit card accounts or loans that still appear to be open on your credit report. The creditors and lenders themselves are the first points of contact that can help clear up any issues regarding your use and repayment of credit. Again, it’s a matter of going directly to the source.

When to contact the credit bureaus first

There are a few reasons for reaching out to a reporting agency directly. The most common instance is when the other third parties can’t shed light on the mistake. You would likely reach out in cases where an old tax lien or delinquent payment still appears on your credit history after the seven-year mark expires. Or if you’ve solved the problem with the primary source, but your report itself is still incorrect.

When you have to fix an error on your credit report, the first thing to do is stay calm. Next, be patient. Fixing business credit report mistakes may take a while — and you may need to contact a few different companies to get things fixed.

Track your credit in near-real-time

Knowledge is power, particularly with regard to your company’s overall financial health. PayPie’s cash flow analysis helps you forecast future cash flow and track other key metrics like income vs expenses or where your greatest strengths, exposures, and opportunities lie.

Your business risk score, featured prominently in the report dashboard, is generated using a sophisticated algorithm along with the current data in your small business accounting software. This score (from 0 to 100) gives you a sense of how third parties, especially lenders, view the financial strength of your business.

cash flow management main dashboard

PayPie is currently compatible with QuickBooks Online and more integrations are in the works.

This article is informational only. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via Pexels.

10 Free (& Fun) Things to Do at QuickBooks Connect San Jose 2018

QuickBooks Connect San Jose Blog Header

We were going to call this the Insider’s Guide to Managing Cash Flow at QuickBooks Connect San Jose. But really, who doesn’t stop and turn their heads when they hear the word “free”? Of course, you paid for attendance and travel. But, as your cash flow forecasting advocates, we wanted to suggest a few cost-effective ways to make the most of every minute:

1. Plan ahead

Go to the QuickBooks Connect San Jose 2018 event page and see who’s exhibiting. If there’s a company you don’t want to miss, reach out ahead of time. In most cases, they’ll be willing to set up an appointment. (PayPie will be at booth 12-A. If you’d like to reach out in advance, please drop us a line.)

Another way to make your list is to check the QuickBooks App Store reviews to get unbiased, first-hand accounts. Furthermore, keep your primary business goals top-of-mind and use them as a filter for connecting with vendors and selecting informational sessions.

QuickBooks Connect San Jose Stage

Research the speakers and their backgrounds as well. This will help you know who you want to see the most, plus it’ll give you plenty of ice-breakers and conversation starters.

Did you know that MBA star Alex Rodriguez also owns a successful real estate investment firm? Or that Dylan’s Candy Bar founder Dylan Lauren is the daughter of fashion designer Ralph Lauren? And, yes, Mindy Kaling is that girl from The Office.

Several speakers are also authors. Check out their books ahead of time online or there’s even still time to see if your local library has a copy. (Note: If you want to get your book signed, your librarian will kindly ask you to purchase your own copy.)

Want to see if influencers and peers are attending? Visit their blog and social accounts or reach out. Let them know you’ll be there. If possible, set a meeting time instead of relying on your paths meeting in a sea of more than 5,000 attendees.

QuickBooks San Jose Convention Centre

2. Download the event app

Time is money. If anyone understands this, Intuit does. This is why they’ve created a QuickBooks San Jose 2018 Event App to help you plan your schedule and keep up with all the latest information. (Apple App Store | Google Play)

Insiders also advise arriving early to scheduled events to ensure you get your seat. These sessions are first-come, first-serve only. In between sessions, scout out the booths and influencers you want to meet.

3. Say, “Hello”

There’s a reason it’s called QuickBooks Connect. The entire event is designed to bring accountants, business owners and tech experts together. It only takes a second to smile and say “hello.” And make sure your name tag is easy to see. From the exhibit hall to the breakout sessions, there’s no shortage of opportunities to get to meet new people.

Keep your business cards handy, too. Although technology continues to astound, the simplicity and effectiveness of business cards have yet to be outdone.

In their Insider’s Guide to QuickBooks Connect Sydney, Receipt Bank shares a quote from CPA and attendee Sam Rothberg that captures the essence of making connections:

“We all have great knowledge of our industry and we’re all still learning a lot about different areas. Don’t feel like you’re less a person than anyone else. Whoever you’re sitting next to at any of the areas you’re gonna go to, just introduce yourself, talk to them, ask them questions, I’m sure they’ll do the same.”

2018 Small Business App Showdown

4. Meet tomorrow’s industry and tech leaders

QuickBooks Connect San Jose showcases both the Global Firm of the Future Contest and $100,000 Small Business App Showdown.

Held the evening of November 5, the Small Business App Showdown shines the spotlight on 10 of the most promising new QuickBooks Online apps. Each company will appear on stage and a winner will be decided that evening. There will also be an exclusive app finalist section within the exhibition hall.

Shameless plug alert: PayPie is beyond thrilled to be one of the 2018 App Showdown Finalists.

The Firm of the Future Finalists from Australia, Canada, India, the United States and United Kingdom will all be in attendance and the Global Firm of the Future Finalist will be announced on November 6. In addition to being savvy businesspeople, they’re also outstanding networkers and influencers.

Firm of the Future 2018

5. Ask questions

Asking questions is the single most important habit of innovative thinkers. Whether you’re in a small group discussion or breakout panel, you’re here to learn and trade ideas. When it’s time for questions and answers, be a participant. You’re there, in person and so are your fellow experts. Even if you’re an introvert by nature, challenge yourself to speak up.

Pro tip: Bring a pen and paper. Write your thoughts down during the event and prep your question in advance of raising your hand. It’s a good way to add a filter and an extra level of polish.

QuickBooks Connect Exhibitor Hall

6. Keep an open mind

QuickBooks Connect San Jose is defined as, “An event for dreamers and doers – those with passion and drive who blaze their own trails to business success.” In outlining their top 10 tips for attending, Chaser eloquently summarizes:

“Coming into QuickBooks Connect with strongly held preconceived notions about ways of working or which apps are right and wrong for you and your clients, can be dangerous. At best, you’ll waste the time and money you spent on attending. At worst, you may completely miss huge opportunities for your firm and clients and lose your competitive edge.”

7. Be social

Participants and attendees aren’t just active at the event, there are also many conversations to join online — before, during and after the event. Build your tribe and get connected by following:

These are the main accounts. You can also use them as a starting point for discovering other industry peers and influencers. If you’re unable to attend, following the main social accounts and hashtags is also a way virtually experience QuickBooks Connect. Intuit will also be streaming live from the event. (We’ll add a link to the live streams once the event starts.)

8. Score stellar swag

Stickers, t-shirts, headphones, notepads, stress balls and more — you name it, you’ll find it here. If there was a swag hall of fame, QuickBooks Connect San Jose would already be an inductee. A word of caution: Most airlines charge for checked baggage these days. If you’ve got a serious swag habit, leave room in your carry on bag when you’re packing.

9. Schedule downtime

Booths, speakers, events. Lions, tigers and bears… oh my! Even the most seasoned event goers need to plan breaks. Be sure to give yourself time to take a deep breath, gather your thoughts, remember what day it is…

QuickBooks Connect is incredibly exciting and engaging. However, it’s not an extreme endurance challenge. (Unless you make it one.) By taking breaks, you will still make amazing discoveries — sans the risk of life and limb and exposure to the elements.

10. Dine in

Each event pass includes daily meals and beverages. In addition to saving you time and money tracking down external sources of sustenance, grabbing a quick bite is yet another way to mix and mingle. Plus, we hear Intuit puts on a good spread. Perhaps in addition to comfy shoes, you might want to pack stretchy pants.

Last year, 98% of accounting professionals who attended QuickBooks Connect San Jose felt it would help them serve their clients even better. Although that statistic is hard to qualify on an income statement, it’s fairly substantial ROI. For three days, you’ll be mingling with some of the smartest, most talented people in your field. Get excited and seize each day!

The QuickBooks Connect, Small Business App Showdown Firm of the Future logos are the property of Intuit and used with permission. Lifestyle images of QuickBooks Connect San Jose are also used with permission.

5 Reasons to Use PayPie for Your Cash Flow Forecast

cash flow forecast hero

Few business metrics are as important — or insightful — as cash flow. It tells you if you’re bringing in more than you’re spending and how efficiently you’re operating.

If you look closer there’s even more to see, such as how well you’re poised for future growth. Especially if you make a cash flow forecast a routine part of your financial analysis.

PayPie’s insights and analysis demystify cash flow projection. We’re a cash flow superhero. What was once a time-intensive foe is now just a few simple clicks. Our interactive dashboard provides a detailed breakdown of key financial variables — using the current financial data in your accounting software.

What can you learn or take away? Here’s our list of the top five things every business gains from using our intuitive cash flow tools:

1. Know your cash flow

A dollar’s a dollar. There’s a reason why cash flow is an unbiased and universal measure of business performance.

It’s a make-or-break metric for businesses of every size — but it’s particularly crucial for small- and medium-sized enterprises (SMEs) whose survival depends on the income earned from operational cash flow.

When these businesses fail, more than half, 60% cite issues with cash flow as a root cause. Furthermore, most SMEs only have enough working capital on hand to cover 27 days of expenses. However, businesses who monitor cash flow on a monthly basis have an 80% survival rate.

The facts speak for themselves. Keeping an eye on your cash flow shows you what’s actually going on within your business. Your cash flow statement and cash flow forecast tell you: where the money coming in, where’s it’s going out, and the rate at which it’s moving in either direction.

PayPie’s cash flow forecast and analysis helps you see the patterns in your cash flow — showing you what’s happening now and providing a solid indication of what will happen in the near future. It’s like looking both ways before you cross the street. If you take the time to assess your current situation, you’re much less likely to get hit by that bus you never noticed.

Balance Sheet

2. Identify strengths and weaknesses

Spreadsheets only tell a part of your company’s story — especially if you’re a visual learner, as most people are. Plus, few spreadsheets can show you the true story of your company’s efficiencies or clearly illustrate your revenue cycles. After all, the best way to notice a pattern is to see it mapped out in graphs and charts — rather than numbers and percentages.

Routinely performing a cash flow forecast and analysis can help you see:

  • If there are concerns within your accounts receivable and payable processes, such as consistently late payments or mistimed cycles.
  • Where your efficiencies and inefficiencies lie, in terms of:
    • How your revenue correlates with expenses.
    • Your best sources of recurring revenue.
    • Your last effective income streams.
  • How to plan for seasonal upturns and downturns.

Profit & Loss

3. Determine your financing needs

When you have a good handle on your cash flow, you not only know where your business stands, you also have a pretty strong idea of where it’s headed. As a result, a cash flow forecast helps you better plan for when you’ll need funding to seize upon growth opportunities or simply upgrade or maintain your current status quo.

To put it simply, when you know how much money you’re earning, how much your spending and when this money is being paid to you or is due to others, you have a much better handle on when you’ll need access to more cash or be able to repay lenders. No one likes a fire sale or being at the mercy of high-risk lenders.

Being prepared means knowing your choices. It gives you the chance to learn about and choose from either traditional or non-traditional lending options (or a mixture of both long- and short-term options). In fact, traditional lenders, such as banks, will even take a cash flow forecast into consideration as part of the application process. And once you’ve acquired financing, forecasting will help stay on track with your repayments.

4. Build better financial health

Just as a fitness tracker helps you build better health habits — a cash flow forecast helps you monitor your business’ financial vital signs. Our intuitive dashboard gives you robust analytics in easy-to-digest formats, making it simple to track your business’ overall fiscal health.

Is managing a business a lot like running a marathon? Sort of. In essence, the principle is very much the same. You make a plan, set goals then compare these targets with actuals. For example, if you’re working on a goal of lowering payment times from net 60 to net 30, your cash flow forecast will help you track your progress. Or, if you hit a wall, it’ll help you figure out why and how to push through whatever’s holding you back.

Routine cash flow forecasting and analysis also helps you create and refine a cash flow budget (training plan)— establishing a range of benchmarks to compare with actuals.

risk score

Our proprietary risk score, featured prominently within the dashboard, is a flagship indicator of financial health. It’s a comprehensive assessment of the determining factors prospective lenders, vendors and other third parties take into account before offering financing or extending credit.

5. Make data-driven decisions

Financial planning and business strategies are only as good as the data that drives them. Both require constant refinement, which you should always base on performance metrics and data. If you’re not iterating on your business tactics, you’re falling behind. And if you’re not using data to inform and evaluate decisions, you’re charting a course in the dark.

Confidence comes from knowing you’ve done all the hard work and you’re ready for what lies ahead. When you’re wearing the many hats of a business owner, every tool that gives you an advantage is a win. This is why we’ve created our cash flow forecast and analysis in the first place. To empower you with the information needed to point your business in the right direction.

cash flow management main dashboard

Empower your business

Ready to put your data to work for you? All you have to do is create a PayPie account and connect your accounting software.

More Reading

Want to learn more about cash flow? Here are some of our top posts:

At the writing of this article, PayPie currently integrates with QuickBooks Online. Integrations with other platforms are in development. 

This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via PayPie and Pexels. 

Business Credit vs Personal Credit: Why There’s a Difference

business credit, personal credit and trust

Most people recognize the importance of their personal credit score. It determines the credit cards you qualify for, if you can get a good rate on a personal loan, and whether you can get a mortgage. All too often, entrepreneurs may not realize that they also have a business credit score. This rating can be just as important to your business as your personal score is to your personal finances.

Protecting and maintaining a solid business credit score is essential to securing financing and setting up favorable terms with vendors. Whether you’re an old hat or new to the world of business ownership, knowing where you stand is the first step toward building solid business credit. (Get a quick estimate of where you stand with a risk assessment from PayPie.) 

What’s the difference between a business credit score and a personal credit score?

The concept of a credit score — be it a business credit score or a personal one — is to take one’s lending history and distill it into a singular metric. This number reflects how good you or your business is at paying back the money it borrows. Both business credit and personal credit reporting agencies develop their credit scores through proprietary algorithms and base their figures on set scales. In the end, both are measures of trust. (Imagine if you scored your friends and family members the same way.)  

Personal credit scores can go up to 850, although few (if any) people have one that high. An “excellent” credit score is 750 or above, which means you’re among the top contenders for a loan. A score between 700 and 749 denotes “good” credit, and means you’re likely to get approved for most (but not the premier) loans and credit cards. Once you’re between 650 and and 699, you’re in “fair” territory, and become less attractive to borrowers. Beyond fair territory is “poor” (600-649) and “bad” credit (below 600).

A similar setup determines your business credit score. Business credit reporting agencies look into whether your business pays its bills on time, uses only a moderate amount of its credit limit, and how long its been in operation. Business credit scores also take your industry into consideration, as business trends can impact your ability to pay back future debts.

Dun & Bradstreet, Equifax, Experian, and Transunion use their own algorithms to determine how creditworthy your company is, but grade with the same score range (0 to 100, with 100 being the best credit score possible). FICO’s Small Business Scoring Service, however, uses a 0-300 range for its scores. Each will look at many of the same factors to determine your company’s credit score, however.

What’s a Business Credit Report and Why You Should Care. 

business credit analysis

Why is business credit important?

Your business credit score does more than demonstrate how well you pay your bills. A good credit score can mean the difference between getting a loan with favorable terms, or even getting your application approved at all. Business credit scores provide lenders with a snapshot of how trustworthy your company is with its money, and if it’s risky to provide you with funding.

A good credit score inspires confidence in prospective lenders, business partners, and vendors. It demonstrates at a glance that your company’s 5 C’s of Credit are in good shape, that the industry it’s in is stable, and that your business has a good chance at remaining open for the next 12 to 24 months. You can put together a dazzling presentation to lenders and prove your business model, but your business credit score does the real talking.

It’s vital to consider your business credit from the moment you set up shop. Even if you don’t foresee the need for a loan, you’re going to want to start building a business credit history as soon as possible. If you do end up needing a loan, and want to prove that your company is worth the investment, you’ll be glad that you did. Plus, the sooner you build business credit, the sooner lenders can stop relying on your personal credit in order to make decisions about your company’s creditworthiness.

Read More on Improving Your Business Credit Score.

How personal credit can affect business credit

It’s essential to keep your business and personal finances separate. This isn’t just good for cash flow monitoring, it’s also crucial for your business credit as well. Lenders will look at your personal credit score if your business credit history isn’t available, or doesn’t provide a robust picture of its borrowing history. This is great if your personal credit is good or excellent — less so if you have a shaky credit history.

This may seem paradoxical, considering that most corporate entities protect individual owners from taking on their company’s legal and financial obligations. But matters of credit tend to function outside of this convention. Creditors can access your personal credit history and credit score in order to make business decisions. Most will do so as part of the application process, too. It’s particularly important to have a good personal credit history, then, if you want to borrow for your business. Even if you’ve got a great track record with your company’s credit, you may still get rejected for loans and credit cards if your own credit report comes back spotty.

Although lenders will consider your personal credit as part of most business loan applications, you can still put your best foot forward by building business credit early. This makes it easier for lenders to evaluate your business on its own merit, rather than relying more heavily on your own personal finances.

Read More on Separating Business and Personal Finances. 

How can I improve my business credit score?

There are ways to improve your business credit score — even if you’re just starting out. Here are four tactics to use to build business credit and raise your credit score:

1. Apply for a business credit card.
If you haven’t done so already, apply for a business credit card and use it monthly. More importantly, pay the balance off, in full, every month and stay well below your credit limit. The longer you do this, the more you demonstrate your company’s ability to handle money well and pay back debts. If you already have a business credit card and didn’t pay your full balance every month (or even missed a few months’ payments altogether), the same logic applies. Build a steady habit of paying your balance in full, and you’ll be on your way toward a better score.

2. Check for mistakes.
You should also make sure that your company’s credit history is accurate. Purchase a credit report from one or more reporting bureaus and review the information therein for any inaccuracies. If you happen to find an error in your report (nearly 25% of businesses do), be sure to contact the issuing bureau immediately. You’ll want to monitor your credit history regularly for any inconsistencies (or worse yet, fraudulent activity).

3. Negotiate trade credit.
Another great way to improve your credit score is to establish trade credit with recurring vendors. Trade credit means that a company trusts you to pay for goods and services per period, rather than conducting a transaction every time your order gets fulfilled. The more trade credits you establish with repeat clients or vendors, the more you can demonstrate that your company is trustworthy. You uphold your obligations to pay, and do so when scheduled. This is exactly what future lenders want to see.

4. Establish a line of credit.
Consider opening a business line of credit if you want to improve your credit score. A line of credit avails you to a set amount of money from which you can borrow, only paying interest on the funds you’ve taken out. Lines of credit demonstrate that you can consistently pay back your debts. Plus, they build trust with your existing lender, which may make them more inclined to approve future loans as well.

It’s important to take charge of your business credit score, whether you’re just starting your business or have been in operation for years. Credit is not simply a number that’s assigned to you — it’s a reflection of your own behaviors, patterns, and business operations.

Read More: The 5 C’s of Business Credit Explained. 

Business credit and asset-based lending

Earlier in this article when we talked about building business credit, we discussed traditional forms of business financing. However, you should also be aware of the growing range of alternative lending options, including invoice factoring.

Invoice factoring is a type of asset-based lending in which you sell an outstanding invoice to a factor (lender) who gives you a set percentage of the invoice. The factor then handles the collections process and forwards the remaining balance, minus interest and fees once the invoice is paid.

Within this process, your risk profile is considered when setting the rates. However, the invoice itself serves as the collateral. Note: As invoice factoring isn’t captured by the established credit bureaus, it won’t hurt your business credit score. And if you use invoice factoring to ensure that you make other creditor payments, it helps you build business credit.

Assessing cash flow, risk, and financial health

If you use small business accounting software, you’re off to a great start. With PayPie, you can take this data and import it into an interactive dashboard that helps you analyze and monitor your most important metrics from income and expenses to the customers that represent your greatest credit exposures.

cash flow management main dashboard

Cash flow and credit drive your business. Get the keys to take charge with PayPie.

PayPie currently integrates with QuickBooks Online, with further integrations planned for the future.

This article is informational only. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via Pexels. 

Working Capital vs Cash Flow

Working capital vs cash flow main imageAt PayPie, we understand that small business owners are always looking for ways to keep track of their company’s financial health. But it’s not always easy to know the difference between key measurements (accounting terms) like working capital and cash flows.

Each of these variables provides a different glimpse into your company’s finances. Working capital offers a snapshot of your company’s present ability to pay its most immediate debts, while cash flow projects all income and expenses over a specific period of time. Think of it as a macro and micro level of detail. Cash flow gives you the big picture of your inflows and outflows. Working capital zeros in further by analyzing your cash flow to ensure that you can meet your payment responsibilities.

Despite some similarities between working capital and cash flow, each tells a different story. Cash flow forecasting gives you the insights and analysis to examine both. In this article, we’ll take a closer look at how working capital differs from cash flow.

Working capital definition

What is working capital?

Working capital is the amount of operating money your company has after your debts are accounted for. This number not only includes the total amount of cash you have in hand. It also factors in the value of your equipment, investments, and inventory. In terms of debts, working capital factors in things like accrued expenses, accounts payable, short-term debt, deferred revenue, and the amount of long-term debt you may owe. Working capital compares assets and liabilities for the short-term, usually up to 1 year (12 months) at a time.

Here’s another way to understand working capital: Say a large segment of your company’s clients are affected by a natural disaster, delaying payment on current purchases and postponing additional near-term orders. Your bank loan is also due in full at the end of the month. Your customers are all busy responding to Mother Nature’s wrath and won’t have their own businesses back online come back for a few months. But, if you have working capital, you can cover this unforeseen cash flow hiccup with the funds you have at hand.

Cash Flow Forecasting: What You Need to Know 

Current ratio (good ratio) and working capital

It’s easy to get a baseline understanding of your company’s working capital by way of its current ratio. The current ratio demonstrates your company’s ability to pay for its long- and short-term obligations by assessing its total assets versus its liabilities. You can calculate your current ratio by dividing current assets by current liabilities. A result of one or above is considered a “good” current ratio.

The calculation itself is simple, but it’s important to make sure you’re accounting for every asset and liability, as opposed to only a handful. Your assets are anything your company owns and could turn into cash within a year. Liabilities are every debt or expense that your business expects to pay within a year or a business cycle.

Calculating a current ratio: An example

For this example, Connor’s Contracting has $300,000 in current assets and $100,000 in liabilities.

Current ratio = current assets ÷ current liabilities

Current ratio = $300,000 ÷ $100,000

Current ratio = 3

As a ratio above 1 is desired, Connor’s Contracting’s current ratio of 3 shows that the company is in good standing and capable of repaying debts, even if it were to incur an unexpected dip in sales or unanticipated expense.

Quick ratio (acid test ratio) and working capital

The current ratio provides a looser method of determining your company’s working capital. The quick ratio, however, is a bit more conservative, as it measures your company’s short-term liquid assets against its current liabilities. The quick ratio does not include inventory in your calculations as it can be more challenging to turn existing inventory into cash on short notice.

This is where quick gets its name — this ratio is all about determining what your business owns that can be turned into cash quickly. (Think 90 days or less.) Most businesses have fewer assets that fit the bill in this case, which makes your quick ratio more stringent than its current ratio.

Calculating a quick ratio: An example

Back to Connor’s Contracting with $300,000 in current assets and $100,000 in liabilities. For this example, let’s say the business has $200,000 in inventory.

Quick Ratio = (Current assets – inventory) ÷ current liabilities

Quick Ratio = ($300,000 – $200,000) ÷ $100,000

Quick Ratio: 1

With inventory taken out of the equation, the picture for Connor’s Contracting looks a little different. When inventory isn’t counted as an asset, the business’s liquidly is less favorable than when inventory is included.

cash flow compared to working capital

How working capital is different from cash flow

The differences between working capital and cash flow come down to calculations. Working capital takes a broad picture of your company’s overall holdings and debts to determine its ability to meet its financial obligations. Cash flow looks only at your income and expenditures. Granted, several components play a role in determining both working capital and cash flow, but the main difference between these two figures is their scope.

Cash flow reflects the amount of money that your business generates within a set period. Your cash flow shows you how much you’re bringing in, and how much money is flowing out. Cash flow also shows you how much money you have in hand to reinvest in your company.

Working capital demonstrates your ability to pay off immediate liabilities. Your working capital can (and will usually) fluctuate over time, but it’s not the kind of metric that you’d use to make future projections of your company’s solvency. Think of working capital as a more “just in time” way to evaluate whether or not your company is cash positive.

Cash Flow Basics: Key Concepts and Terms 

When working capital affects cash flow

Working capital does more than reflect your company’s current ability to pay off debt and sustain operations. It also helps creditors understand how a would-be borrower takes in revenue, spends its money, and whether or not it is likely to remain solvent in case of an emergency or market downturn.

You’re less equipped to deal with difficult times if your company operates with negative working capital. You may still have positive cash flow on a long-term basis, but you may not able to sustain your business operations if your cash flow dips. There are instances in which a business might be doing fine despite having negative working capital — usually, if it’s just made major investments in its own growth — but these kinds of examples are definitely the exception to the norm. Usually, insufficient working capital means that your cash flow is going to need to be much more positive than it would be otherwise.

Lenders are interested in how your company’s working capital and cash flow affect one another, too. In fact, they’ll likely make a decision on your loan request based on what they see. Borrowing money increases your cash flow, but not in a way that improves your working capital. You’ll see a short-term bump in the cash you have in hand, but you’ll have to reflect the debt repayment in your working capital evaluations. This could make lenders more reluctant to finance your business.

Cash Flow Statement and Forecast: Why You Need Both

Putting all the pieces together

It’s just as important to understand your company’s working capital as it is to keep on top of its cash flow. A cash flow forecast from PayPie provides you with detailed, near-real-time information on your company’s financials — including your current and quick ratios— along with other insightful analysis and breakdowns of your income and expenses. Your risk score, featured within the analysis dashboard, gives you an indication of how positively or negatively prospective lenders might view your business’ financial health.

cash flow management main dashboard

Getting your report is as simple as creating a PayPie account and connecting your QuickBooks Online account.

Not a QuickBooks Online user? No worries. We’re working on collaborations with other platforms, too.

This article is intended to be informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via Pexels. 

Improving Your Business Credit Score: Where to Start

Improving your business credit score main image

Many businesses will need to borrow money at some point to fuel their growth. As part of this process, your business credit score determines whether or not you qualify for financing and the terms that are set. The higher your credit score, the more you’ll be able to borrow and at better rates.

Much like a personal credit score, your business credit score reflects your company’s repayment history with loans, credit cards, and other debts. Improving this score (building your business credit) goes beyond the basics of making timely repayments.

Other factors for maximizing your credit score include partnering with the right vendors, establishing trade lines with vendors, and keeping your information current with the established credit bureaus. You can also get a good indication of your business’ financial standing with the customized risk score generated by PayPie using a combination of current financial data and a sophisticated proprietary algorithm.

What is a business credit score?

Consider that 45% of businesses don’t know they have a business credit score and 82% don’t know how to interpret their credit reports, the answer to this question is relatively important.

It’s true. Your business has its own credit score. The amount of debt you owe largely determines your credit score. The frequency with which you pay it debts and how often you seek new sources of credit also influence your business credit score.

Other metrics that determine your business credit score include your outstanding balances, payment history with vendors and lenders, and the record of purchases you’ve made with vendors (also known as trade experiences). Credit reporting agencies will also examine your company size, risk factors in your industry, and the amount of credit you’ve used compared to the amount your lenders are willing to give you (also known as your credit utilization ratio).

Reporting bureaus take this information and assign your company with a business credit score. Unlike a personal credit score, which goes to 850, business credit scores have a lower maximum range. Depending on the bureau, your maximum score will generally either be 300 or 100, with a few exceptions.

What’s a Business Credit Report and Why Should You Care?

Where does the information for a business credit score come from?

Each credit agency may use a different algorithm to determine your score, and public information largely determines your business credit score (rather than private financial information from credit card issues and lenders for personal debts).

You’ll want to make sure that your business credit score is as high as possible, and that it contains accurate information about your use of credit and your payment history with vendors and creditors. These factors influence your score heavily, and any mistakes may prevent you from getting the credit score you deserve.

It’s also fairly common for businesses to find mistakes on businesses credit scores issued by established credit bureaus. In fact, nearly 25% of all businesses find a mistake that’s significant enough to lower their credit rating.

How to build or improve your business credit score

Your credit score is largely determined by public information, as we mentioned before. But that doesn’t mean that there aren’t several steps you can take in order to make your business credit look as strong as possible.

1. Apply for (and use) a business credit card

Building a credit history means — you guessed it — using credit. Creditors love to see that a business uses its credit wisely over a long period of time. The longer you can demonstrate a track record of proper credit card usage, the better.

If you haven’t already applied for a business credit card, do so as soon as you can. You may not have the highest credit limit or the snazziest card, but it’ll put you on the right path toward building your credit history. From there, you can go on to apply for cards with greater perks or higher credit limits once you’ve established yourself.

Read more about business credit cards: How to use them and how to find the best ones.

2. Establish trade credit with recurring vendors

Setting up trade credit with repeat customers (or vendors) is another great way to demonstrate your creditworthiness. Trade credit is basically the notion of performing services or getting goods from a company without demanding payment after every transaction. Whenever your vendor provides you with their business and does not request cash upfront or upon delivery, they’re extending you trade credit.

Trade credit goes a long way in regard to creditworthiness because it demonstrates that you’re dependable, and pay your debts accordingly. If your suppliers can trust that you’ll pay on time at the end of a predetermined period, other creditors will be more likely to trust you as well.

3. Apply for a line of credit

Another excellent way to build credit history is through a line of credit. A business line of credit is a set amount of money that a lender agrees to provide to your business. You can draw money from the line of credit when you need to use it, and pay interest only on the amount of money you’ve borrowed.

Lines of credit are great for building your credit history, as they show that lenders trust you to be diligent about repaying your debts on a recurring basis. You’ll build trust with your existing lender, and show other potential lenders that you’ve got a good history of fulfilling your obligations.

looking at the numbers in your business credit score

How to check your business credit score

The first step toward improving your credit score is making sure that reporting bureaus have the right information in the first place. Equifax, Experian, and Dun & Bradstreet all provide business credit reports — each with a different score based on their internal algorithm.

Dun & Bradstreet charges around $60 and provides you with a credit report, credit summary, and risk score. They also provide you with a PAYDEX score — a measurement of how quickly you pay your creditors — as well as a financial stress score that assess the overall financial health of your company. Even if you don’t opt to get a Dun & Bradstreet report, it’s a smart idea to register for a DUNs number, which puts you in the company’s database and sets up your credit file.

Equifax and Experian both offer credit reports, but neither of them are as robust as Dun & Bradstreet’s. For $99.99, Equifax will send you a report that includes your public records and a business failure score that gives you insight into how sustainable your company is. Experian charges $36.95 for its report, but only provides you with basic details about your company’s credit projections.

Your PayPie risk score is a focal point of the insights and analysis you receive when you connect your business. It gives you perspective on how prospective lenders and business partners might evaluate your current financial standing.

The 5 C’s of Credit Explained. 

4 ways to improve your business credit score

There are several ways you can improve your business credit score beyond opening credit accounts and being good about repaying debts on time. In fact, it’s important to go beyond these elementary tasks if you want to be proactive about guarding your business credit score against erroneous information, fraud, or unwarranted demerits in your credit history. If you’ve covered the basics of getting a solid business credit score already, here are some of the tactics to take in order to truly take charge of your company’s credit.

1. Monitor business credit score changes

Your business credit report isn’t always perfect. Just like with a personal credit report, it’s common to see errors that could unfairly damage your overall score. Monitor your business credit report often, and report any erroneous information as soon as you see it. This can help ensure that your company gets assessed fairly, and fix any potential loss of points quickly.

2. Pay your bills on time (or before they’re due)

This one might sound obvious, but paying your bills promptly is the best thing you can do to keep your business credit score as high as possible. Many companies report payment histories to credit monitoring agencies. The faster you submit payments, the better you’ll look when they give their information over to these organizations.

3. Have a mix of credit

Using a business credit card is great for your credit score. But having a line of credit, installment loan, and a business credit card can be even better. This demonstrates that your business can maintain several kinds of credit at once. The more diverse your credit lines are, the more you demonstrate your ability to pay off what you owe under different circumstances. You’ll have to use each of these credit options wisely, however, or you can end up doing more harm than good.

4. Sustain a good credit utilization ratio

Merely opening a business credit card account isn’t enough to show that you’re creditworthy. You need to actively use the card (or your line of credit, if that’s your preference) in order to give credit monitoring companies a glimpse into your trustworthiness. The more you use your credit card — and pay your bill on time — the more these agencies can trust that you’re a good candidate for loans. Aim to use only 25% of the total amount of credit provided to your company, however. Carrying a high balance can make you look like a riskier bet, as it signals that your business might not have the cash to pay for goods through other means.

How Cash Flow Forecasting Maximizes Business Funding. 

Keep an eye on the big picture

When you connect your accounting software to PayPie, you get the tools you need to monitor the key facets of business financial health. Our dashboard gives you the charts and graphs you need to see how your income compares your expenses or how your overall inflows compare to your outflows.

cash flow management main dashboard

You get a deep dive into accounts receivables, including the invoices that have been outstanding the longest and the customers that represent the greatest level of exposure. The cash flow forecast helps you project how your inflows and outflows will perform in future and the risk score is a capstone metric that you can use to evaluate your current financial position.

Your credit rating and risk profile aren’t formed in a vacuum. They’re the sum of many moving parts and the more you know the more you can plan and respond accordingly. Managing risk and cash flow shouldn’t be intimidating. With the right tools, financial management is empowering.

Get started today and give your business the tools to build success.

PayPie is currently compatible with QuickBooks Online and more integrations are in the works.

This article is informational only. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Image via Pexels.

Burn Rate and Runway: How Long Your Cash Will Last

calculating cash flow burn ratePeaks and valleys are the norm in business. A big part of whether your company has staying power is whether you can survive those tougher times when your cash inflows plateau. Understanding your cash burn rate is an essential piece of making it through.

Once you know your company’s burn rate, you can manage your cash flow more effectively. At PayPie, we’re strong believers that the more you know (cue the shooting star), the better you can position your business for growth and stability.

What’s a business’s burn rate?

Your burn rate is the amount of money you spend to keep your company going during a given period. (Burn rate is almost always measured monthly.) You can also think of it as your monthly net-negative cash flow.

Burn Rate

Burn rate isn’t just a metric for startups

Although you might often hear references to burn rate or cash burn in the context of startups, this metric is just as useful (and important) for businesses that have been around for years.

Startups pay extremely close attention to burn rate because:

  • Many of these businesses take several years to be profitable. That means that they have to be extremely diligent about how quickly they’re burning through the money in the bank because the company’s gross cash burn is the same as its net cash burn. (In other words, there’s no money coming in to offset any gross operating expenses.)
  • Burn rate is a metric that investors care a lot about. They want to know how far their existing funding will go — and how far the money they’re raising will go, too.

But these things are relevant to your mature business, too.

How to Read a Cash Flow Statement 

Why you should care about your burn rate: runway

The above is a really just a fancy way to get at understanding a business’ “runway.” And that’s important for every company. You want to know how long your company can last if you never make a cent again. (Don’t worry, you will! We’re just giving you the facts so you can hedge against worst-case scenarios.)

Runway is how long your business will be able to stay open at that current burn rate. That’s why every small- and medium-sized business needs to care about burn rate and runway.


Calculating your burn rate and runway

Luckily, this important metric isn’t too hard to figure out. We’ll calculate the monthly burn rate.

  • Step 1: Pick a period on your cash flow statement. Find the starting point of your cash balance, then locate the ending point for the period.
  • Step 2: Subtract the starting point from the endpoint. Then, divide the difference by the number of months in the period you’ve chosen.
  • Step 3: Access your bank balance. Divide your balance by the burn rate. Your product is your minimum runway, based on your cash burn. (Note that this number assumes stable net cash burn, aka you don’t bring in any additional revenue).

Cash Flow 101 — The Basics 

An example of calculating burn rate

Let’s say we’re examining the first quarter of the year. Your cash position at the beginning of January was $100,000 and at the end of March, you finished up at $70,000. Right now, April 1, you have $280,000 in the bank.

Calculating monthly burn rate:

$100,000 (starting balance)- $70,000 (finishing balance) = $30,000

$30,000 / 3 (months) = $10,000

Monthly burn rate = $10,000

Calculating remaining runway:

$280,000 (cash in the bank) / $10,000 (monthly burn rate) = 28

Remaining runway = 28 months

10 Best Businesses for Cash Flow

4 ways to manage your cash burn rate

You might find it a bit scary to see your business’s lifetime reduced down to a number of months. And, hey! With good reason. If you’re operating in the red, running with an end in sight can feel like receiving a terminal diagnosis if you’re running on reserves.

But it’s much better to know what’s wrong so you have the opportunity to fix it before it’s too late.

1. Cut your expenses

As you might expect, the easiest and most straightforward way to bring down your burn rate and add time to your runway is to spend less. Consider auditing your operating costs before anything:

  • Is there anything you can do to bring your monthly fixed costs down since those are the big, recurring expenses that cut into your runway?
  • Are you able to refinance any existing debts?
  • If your operating margins are extremely thin, are you spending on the right things? Did you try to kick into a period of high growth before you were ready?
  • Are you running as lean as possible?
  • Is there a way to get your costs of goods and services (COGS)down? Can you renegotiate contracts with suppliers, or swap out elements of your manufacturing with different, lower-cost materials?

There are a lot of questions you can ask of your business. Now’s the time to ask them.

2. Generate more revenue

If cutting your costs isn’t or won’t be possible, you might want to explore the possibility of earning more money for your business. Note: Opening new revenue streams often requires significant investment.

That said, you might be able to make smaller tweaks to existing systems to either tap into or build upon recurring revenue. Consider some of the following questions:

  • Is your business model a fit for any sort of subscription- or retainer-based services?
  • Can you offer an upgraded tier of service for an increased fee?
  • Do you have any unsold inventory that you can get rid of for cheap? (Cheap is better than unsold, and the cost is already sunk, remember.)

Recurring Revenue: 5 Proven Models

3. Raise funds or apply for financing

You have a couple of options here.

First, if you haven’t taken on investors before, maybe now would be a good time to consider them. Investors aren’t for every small business, but if you want to infuse capital into your business to give yourself more runway, you might look into raising money.

Second, and perhaps more practical for most small businesses, is to look into business funding. You can apply for several different types of financing to buffer your cash reserves, including business line of credit and term loans. Both of these traditional options are a great place to start.

4. Control your cash flow

Above all, controlling your cash flow is the best way to manage your burn rate without dramatically altering anything. There are a few ways you can do this operationally:

  • Can you collect on your outstanding invoices more quickly?
  • Evaluate your current trade credit relationships. Can you incentivize your customers to pay in cash more, and more often?
  • Can you pay your own invoices slower, or negotiate (or renegotiate) your own trade credit terms?
  • Do you need to take advantage of invoice factoring to free up unpaid or not-yet-due invoices?
  • Can you incentivize monthly customers to prepay yearly fees in full?

The second part of managing your burn rate is taking advantage of all of the financial data you have. PayPie’s insights and analysis, which contain a cash flow forecast and business risk score, help you fill in vital pieces of your financial puzzle.

By integrating directly with your accounting software, your insights and analysis from PayPie will automatically reflect the most current data in your system. (Once connected, PayPie checks for updates daily.)

Get started today. Create your account and connect your business.  

PayPie is currently compatible with QuickBooks Online and more integrations are in the works.

This article is informational only. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Image via Pexels.

Cash Flow Statement and Cash Flow Forecast: Why You Need Both

cash flow forecast vs cash flow statementCash flow is a make-or-break factor for small to medium-sized enterprises (SMEs). Whether you’re a manufacturer or a service-based business, you pay your expenses and fund your business through money that comes from your operational cash flow.

Managing cash flow is crucial to ensuring that you have enough money to cover the bills, fuel growth and respond to the unexpected. However, many businesses walk an extremely fine line with only enough cash reserves to cover 27 days of expenses. Depending on the industry, some businesses only have a $7 difference between the money coming in and the amounts owed.

At PayPie, we realize that If you want your business to survive, you have to keep a close eye your cash flow using both your cash flow statement and cash flow forecast. Each tool plays a pivotal role in providing you the information you need to identify your strengths and weaknesses.

27 days of cash flow

Your cash flow statement: What it is

There are three financial statements that every business should create and review on a regular basis: your income statement (profit & loss), balance sheet and cash flow statement (statement of cash flows).

Your income statement tells you if your business is earning a profit and your balance sheet compares what you own to what you owe. A cash flow statement, which pulls numbers from your income statement and balance sheet, shows how cash is being used within your business.

A cash flow statement compares inflows and outflows in three areas:

  • Operations — The day-to-day costs of producing, promoting and delivering your bread-and-butter products and services.
  • Investment — For most SMEs, this is the purchase or sale of capital investments, such as buildings, land and equipment.
  • Financing — Includes all funding activities.
    • For startups and businesses with investors, investment dollars are tracked here.
    • For businesses with shareholders, related activities are tracked under financing.

There are two methods for creating a cash flow statement: direct and indirect. If you use the direct method, you follow a cash-based accounting system where you track payments as they’re made or received. If you use the indirect method, you follow accrual accounting rules where payments are recorded before they’re received.

Five Stories Your Financial Statements Tell 

Your cash flow statement: What it tells you 

Whether you create a one every week, month or quarter, your cash flow statement shows you how much money you’re bringing in and paying out over that particular period of time.

Another way of saying this is that a cash flow statement indicates your cash position at a set point. It’s basically a summary of this equation:

Cash in (inflows) — cash out (outflows) = cash position (positive, negative or break-even)

What it lacks is any historical (longitudinal) information or in-depth analysis. However, a cash flow statement is a key building block of a cash flow forecast.

How to Read a Cash Flow Statement

income statement and balance sheet in a financial report

Your cash flow forecast: What it is

A cash flow forecast (cash flow projection) uses insights and analysis to anticipate how a business’ cash flow will perform over time. As the reporting tool for cash flow, a cash flow statement is foundational to cash flow forecasting.

A cash flow forecast helps you examine how key variables have performed in the past — in order to help you predict how they’ll behave in the future. Using operational cash flow as an example, forecasted cash flows help you delve into trends on how expenses like labor, utilities, materials compare with sales over a given month, quarter or year.

Businesses with volatile cash flow will sometimes perform cash forecasts on a weekly basis in order to assess their constantly changing cash flow position.

Cash Flow Basics — Key Concepts and Terms

Your cash flow forecast: What it tells you  

The phrase “over time” is key in defining the benefits of cash forecasting. By looking back and examining data from previous cash flow statements, you’re better able to identify:

  • Potential surpluses and deficits in your total cash flow.
  • When your incomes are highest and lowest.
  • When your expenses are highest and lowest.
  • The impact of the cycles in your accounts receivable and accounts payable.
  • How your debt levels and the costs of these debts are affecting your cash flow, how well you’re maximizing your current funding and your ability to qualify for further financing.

Knowing your current and long-term cash positions also lets you make more informed business decisions. If you’re planning on hiring, you’ll be able to predict if your business can handle the additional costs. The same is true for almost any growth initiatives, from research and development to expansion. And should you encounter a cash flow crisis, the more you know about what contributed to the shortfall will help you find the best way to recover.

Tools, like our cash flow forecast, help you take the information from your basic financial statements and make them easier to visualize. Spreadsheets are one thing, but charts and graphs give you complete picture that data points alone can’t provide. Your risk score, housed within the cash flow forecast, also gives you a reference how external lenders and vendors view your business in terms of financial risk.

Cash Flow Forecasting — What You Need to Know

The benefits of better cash flow

Businesses with a strong, stable cash flow are better able to seize growth opportunities and withstand unexpected expenses. The better your financial health, the more likely you are to secure more favorable terms with lenders and vendors as well. Not to mention, the simple peace of mind of knowing that everything’s under control.

In a perfect world, every business would be cash flow positive. But nothing’s ever black-and-white. This is why cash flow forecasting can also help a business solve cash flow problems by pinpointing problem areas in order to formulate solutions. Even businesses looking to rebuild credit benefit from cash flow forecasting. Especially, if you use your cash forecast to ensure that you’ve got the funds to schedule timely repayments.

cash flow management main dashboard

Create a cash flow forecast — using your current financial data from your QuickBooks Online account.

All you have to do is register for PayPie, connect your account and run your report. Plus, there’s no charge for signing up or running your report.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon. 

This article is informational only. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via Pexels and Shutterstock.  

Trade Credit: How It Works for Buyers and Suppliers

trade credit main image

Having the cash on hand at any given time to finance major business operations is tricky. We’re particularly talking about inventory, raw materials, or supplies to drive operations. That’s why trade credit exists: To help you gather the cash needed to pay off those bills over time.

Because, yes, although you’d love to have thousands — or maybe hundreds of thousands — of dollars immediately available to pay your vendors as soon as you purchase goods, it’s unlikely that you do. Or, at least, that you can constantly do it that way. Again, this is why trade credit exists. Here’s how it works and how it affects both buyers and suppliers.

Know how much cash you have on hand.

Trade credit: Defined and explained

If you’ve ever heard someone use the phrase “net terms,” then you’ve heard of trade credit even if you didn’t know it by its other name.  (Luckily, a rose by any other name smells as sweet, right?)

In simplest terms, trade credit is a short-term financing agreement between a buyer and a supplier. The supplier extends credit to the buyer, allowing them a designated period of time after delivery of the product or service to pay the fee. Those “net terms” you’ve heard of are the period during which the vendor has agreed to extend credit. So, net 30 means 30 business days, net 60 means 60 business days, and so on.

Trade credit is also the easiest type of short-term financing to get as it doesn’t involve a formal application process. And, since 25% of small-to-medium business owners (SMEs) are denied financing from lenders due to poor earnings and cash flow, it’s an essential part of the trade ecosystem.

How accounts receivable affects cash flow

What is trade credit used for?

Trade credit is used to facilitate the purchase of large goods and service contracts. (Even smaller purchases, too, depending on the relationships in place with suppliers.) With trade credit, businesses can purchase what they need at once and stagger repayment across vendors.

Also, implemented intelligently on the part of the buyer, trade credit also gives businesses the flexibility to make sure that they will have enough money to cover all of their trade credit bills on time.

What kind of businesses use trade credit?

Lots, actually. Trade credit is a business-to-business (B2B) service. But it’s very well utilized across industries. Restaurant owners buy from their ingredient suppliers on net terms. Lawn care companies bill their homeowners using trade credit. Strategy consultants extend a line of trade credit to their clients.

With that in mind, though, a buyer doesn’t automatically get trade credit just because they want it. You’ll want to think about trade credit as a tool for building relationships between businesses — and, subsequently, building business credit with continued payment on time and in full. A supplier won’t extend a business a trade credit line unless they have solid trust that they’ll be recouping all of their money at the end of the time frame.

Invoice Payment Terms — 7 Key Concepts and Tips 

trade credit secondary image

Advantages of trade credit

For buyers:

  • More time to pay. It’s hard to come up with the money you need to pay for major purchases all at once. Trade credit extends your window of payment from COD (cash or collect on delivery) to the terms you and your supplier agree on.
  • Build business credit. Trade lines of credit help you establish business credit. Some major credit bureaus take trade credit into account when calculating business credit scores.
  • Potential discounts. Many suppliers will offer small discounts to incentivize buyers to pay before their due date. You might be able to save money if you can pay before your bill comes due.

For suppliers:

  • Open up more relationships. The vast majority of buyers rely on trade credit for large purchases. Offering this financing for buyers can open up new relationships and potentially larger purchases with existing ones.
  • Becoming a preferred supplier. Customers may favor you if they’re able to negotiate favorable trade credit terms with you that aren’t available through competitors.

How to make the most of every invoice you send.

Drawbacks of trade credit

For buyers:

  • Potential discount loss. This is more opportunity cost than anything. Still, if you wait to pay your invoice until its due date, you forego any potential discount the supplier might offer if you pay upfront in cash.
  • Relationship risk. If you aren’t able to pay on your bill for services rendered or goods received, you risk putting your relationship with your vendor in jeopardy.

For suppliers:

  • Risk of delinquency. When you extend trade credit, there’s no guarantee that you’ll get your payment on time — or at all. And although you’ll only extend trade credit to the customers you trust, you’re still taking a gamble on their business.
  • Discounting. In order to incentivize your customers to pay before their terms come due, you might have to offer some form of discounting for early payment. This will cut into your margins.
  • Uneven cash flow. The nature of trade credit means you don’t know when your customers will pay. This creates an inherently uneven, unpredictable cash flow. While you want to be flexible, you also want to set terms that favor your business as well.

Establishing trade credit with suppliers

As we mentioned briefly, you can’t just have trade credit simply because you want it. There’s a deep trust involved in establishing payment terms with a vendor. If they extend you financing, they need to feel secure that you’re going to come through with their cash if they front you what you’re buying.

How to establish a trade credit relationship

The good news is, unlike traditional short-term financing, you don’t have to apply for trade credit. The less-good news is that you’ll generally have to begin at square one with a new supplier. That means starting with COD — or even up-front payment, depending on how your vendor works. Then, you might graduate to deposit, installment, or other net terms. But that’ll depend on how quickly and how well you can provide to your supplier that you’re dependable and creditworthy.

Much like a business lender, the business on the other end of the trade credit line wants to mitigate their risk as much as possible. So, although they’re not formally underwriting you, they’ll be judicious about whether or not to extend you advance payment terms.

If a potential partner doesn’t know much about you, they might opt to pay to check your business credit score to see your history with business debt. (This is a service that many of the major credit bureaus provide.) This is just one reason why it’s important to establish trade credit relationships when you can and keep up on top of them once you have them. Proof of past positive relationships can go a long way in building future relationships.

That first one can be tough to get and take time — but it’s crucial to open doors down the line!

The 5 C’s of Business Credit Explained 

What happens if you don’t honor your trade credit agreement

Your suppliers offered you trade credit because they trusted you, right? Don’t lose that trust! But you will if you can’t come through on your payment.

Not only will you very likely lose your opportunity to work on delayed payment terms with your vendors, but some may never choose to work with you again. They also might influence others not to extend you trade financing — especially if you work in a tight-knit industry.

Worst case scenario: It’s possible that if you owe a large payment, your supplier could hire a lawyer and send a collections agent after you.

Remember that even if you plan to pay, albeit late, suppliers are depending on your money. They factor your on-time payment into their cash flow. Coming up short could affect how — and if — another business is able to pay other suppliers, lenders, or finance their own operating costs. That’s a cascading effect! If you have a down month and need more time to pay, let your supplier know as soon as possible.

Offering trade credit to customers

On the other side as a supplier, you’re taking a risk if you decide to offer financing. And it’s important to understand the risk: SMEs spend nearly 15 days a year chasing payment on outstanding invoices.

But, if you size your risk correctly, you could be opening up your customer base.

Understanding accounts receivable turnover.

Determining whether or not to extend trade credit

The first question to ask yourself: Do you have an existing relationship with this customer? Do you have a way to know if they have a good history with payment? If the answer is yes, you might begin by asking for a deposit or a portion of the invoice COD  and extend net terms for the remainder of the invoice. Then, with time and proven responsibility, you can move toward a full trade credit relationship.

If you don’t have any way to gauge a company’s history, you can also either check their business credit score to get of sense of how they’ve handled past debt. Alternately, you can ask for a trade credit reference from other vendors with whom they’ve worked.

Offering an early payment incentive

To incentivize faster and guaranteed payment, many suppliers choose to offer a cash discount. A common discount is 2/10, or 2% off the price of the invoice if paid in 10 days.

Yes, that technically cuts into your margins on your product or service. But having the cash in hand to be able to put back into operating costs or invest, and knowing you won’t be out that money later, is worth it for many businesses.

What to do if your customers don’t honor your trade credit agreement

This is the chance you take, of course. Before anything, you’ll want to send out a late payment reminder. Don’t assume the worst!

In the interim, you might want to look into a solution like invoice factoring. It’s meant for a situation just like this! With invoice factoring, you sell your unpaid invoice to a factor (lender) who’ll pay you a significant portion of the balance. Then, they’ll pursue the outstanding payment from your client, and pay you the remainder, minus their fee, once they collect. This helps a lot with cash flow!

How trade credit affects cash flow

You’ve likely figured out by now that there’s a very direct tie into trade credit and cash flow. That goes regardless of which side of the terms you’re on.

As a customer…

  • You’ll be able to plan your invoice payment based on your cash flow projections.
  • You don’t have to pay COD or pay for everything at once if you don’t have the cash on hand for it.
  • You can stagger payments across multiple trade credit lines based on available cash flow.
  • You can take advantage of discounts if you have the available liquidity and know that paying in full early won’t affect your working capital.

As a supplier…

  • You might introduce an element of unpredictability into your accruals depending on when your customers actually pay.
  • You introduce the possibility of late or non-payment after services are rendered or goods are delivered.
  • You might want to take advantage of invoice factoring to access cash tied up in trade credit. 

With this in mind, the most important thing you can do on both sides of the equation is have the best handle on your cash flow possible. The more you know about the cash you have on hand, the more you’ll understand whether or not you’re able to either extend trade credit or pay off your invoices. That means you need to be able to forecast and project your cash flow accurately — the more data, the better.

PayPie’s cash flow forecasting tool does just that, nearly down to the minute, by integrating with your accounting software to create an interactive and informative dashboard.

cash flow management main dashboard

Signing up for PayPie is easy. Just create your free account, connect your business and run your cash flow forecast.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon. 

This article is informational only. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via Pexels. 

How to Make the Most Out of Every Invoice You Send

Making the most of invoices

Invoices are something you issue to your customers after conducting business. An invoice is a clear indication of the services you have rendered or a product you’ve supplied along with all the associated costs. Invoices are part of doing business and they keep both parties accountable for their commitments.

Having a steady stream of money (also known as cash flow) means your business can continue to fund its operations. If your invoices aren’t serving you well, the resulting cash flow gaps can literally spell doom and gloom. By implementing the right invoicing processes, you not only mitigate any cash flow concerns — but you can also secure greater customer loyalty.

Invoice necessities

Let’s look at what makes up the meat of the invoice — the basic necessities that your customer needs to know who sent the invoice and why. This includes:

  • The name of your business and your logo.
  • Your contact information — business name, address and contact information.
  • The recipient’s name, address and contact information.
  • The product(s) or service(s) for which the invoice was issued, along with prices.
  • Payment terms and conditions, payment deadlines and invoice creation date.

Now that the necessities have been covered, we’re not stopping there — that was the vanilla invoice. We’re here to elevate your invoicing and have every invoice you send generate a whole lot of additional benefit with minimal effort.

Read more about accounts receivable turnover.

invoice as a marketing tool infographic

3 Ways to tap into the marketing potential of your invoices

Many businesses, regardless of their size, underestimate the power that invoices possess. They’re often seen merely as receipts — yet they have powerful marketing potential that often goes unnoticed. Let’s face it, the people you do business with will encounter invoices that are produced and delivered by you. Leverage these nifty little sheets to secure consumer fidelity and even help attract new faces.

Take some time to revisit your invoices — assess the layout, format, and overall look of invoices being sent out to your customers.

1. Add incentives  

Don’t be basic with your invoice creation process and don’t be afraid to drop a few irresistible incentives on the sheet. What do I mean by incentives? Well, what would encourage you to do business again? Discount codes sound pretty enticing to me. What about referral codes to share with friends? Heck yes! Include them too, now your client has a reason to mention you to their friends and family — aside from your splendid quality and customer service of course. Having discount codes and referral options accompany an invoice is a surefire way to get customers coming back to you with friends in tow.

2. Promote new products

Now let’s assume you’re developing a new product. Guess what? You can promote it through your invoice too. The beautiful thing about an invoice is that people value them and inspect them carefully. All eyes are glued to this document, so why not take advantage of all the attention it manages to garner? Include a message or a notification within your invoice informing people of a new product launch or a sneak-peek into future product development. Get your customer excited about the future and any new offering you will have in store for them. This too can go hand-in-hand with the aforementioned promotional codes that may be included in the invoice.

3. Encourage feedback

Use your invoice as a means to encourage customers to give you feedback. This is a great way to further improve your business model and product for any future purchases, thus elevating the perception of your brand and developing social proof.

Keep in mind that customers are the reason for your existence, if it weren’t for them, you wouldn’t be here. Continue to improve the customer experience through a scrupulous feedback gathering process, which can be enhanced through the use of invoices. Include a contact number, or a website URL in your invoice that customers can use to share their feedback.

Invoicing and cash flow

Being able to effectively forecast your future financial situation is critical for any business. This information guides marketing or product development budgets, how you will proceed with expansion and let’s not forget your investors who may be looking to assess your future prospects.

By staying vigilant and organized throughout your invoicing process, you’ll have better information from which to build your cash flow forecasts. For instance, if you’ve set the right terms and your collections are working effectively, you’ll have a better turnover ratio. On the other hand, if your terms aren’t beneficial to your business, cash flow forecasting will help you pinpoint the issues.

Also, keep in mind who your business owes. You probably have obligations to reimburse vendors and various suppliers under strict deadlines, don’t overlook this important detail. Revert back to your accounts receivable and take note to see if your future expected cash flow meets or exceeds your own debts.

Use outstanding invoices to quickly access cash 

Lastly, I want to share something that some businesses — especially new ones —may not be aware of. What I am talking about here is invoice factoring. There may come a time when your business will need to access a sizeable sum of cash quickly, without actually having the necessary funds in hand. In these instances, your outstanding invoices can be converted into cash quickly through a process known as invoice factoring.

You don’t have to wait for your clients to muster up their debt before a deadline that could be a month or more down the road. You can sell off a portion of your accounts receivable to a third party (known as a factor) at a discounted rate. Accounts receivable factoring is typically used as a short-term financing and may be used in conjunction with other financing tools like loans, credit cards or a line of credit.

Stay vigilant of all your outstanding invoices. Some clients can be rather unruly and may not follow through with their financial obligation stifling your cash flow. A reliable factor can alleviate some of the financial woes and give you more breathing room while allowing your business to keep moving forward. (Plus, the factor often takes care of the collection process.)

Read more about invoice payment terms.

Wrapping it up

Often times invoices are seen as the most basic form for depicting a business transaction and nothing more. The good news is that invoices can become so much more and help garner attention and respect your business actually deserves.

Your marketing efforts along with business’ fiscal health can be elevated by carefully structuring your invoices and their delivery method. Now that you’re endowed with this knowledge, maybe the next time you create and send an invoice, you’ll fully realize the potential this document holds.

This guest post was provided by InvoiceBerry, smart invoicing for small businesses and freelancers.

To create cash flow forecasts that help you see patterns in your accounts receivable processes, create a free PayPie account and connect your accounting software.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Images via Pixels and InvoiceBerry.