Credit is the financial lubrication that makes your business vital and growing. Without credit it can be difficult to meet the demands of sustained growth. As business grows you'll constantly need more of everything from inventory to staff and equipment. Don't forget that as you bring in new employees, there'll be additional expenses associated with them such as training, travel, vehicles and fuel.
All these expenses add up and without sufficient credit, you'll be reliant on cash flow or investors to finance your growth. Many times, especially during periods of rapid growth, cash is tight. In addition, if you're an independent small business owner you may not want to relinquish any control to investors.
Typically most businesses won't have the profit necessary to generate sufficient cash flow to finance their growth. It's easy to see why, when each month's expenses out pace sales of the prior month. If you are primarily in the B to B arena, many of your customers will expect to be on account. They will pay their invoices on a certain day every month. In effect you'll be extending them credit. At times that can exceed 30 days, depending upon your invoicing practices and their billing cycles.
A common scenario you will face is customers who pay their invoices on the 10th of the month for invoices they receive before the 26th of the previous month. You could be effectively extending them credit for more than 30 days if, for example, you invoice them for products or services on the 27th of May. Since you won't get paid for that invoice until the 10th of July, you'll be carrying them for 44 days.
Credit is a very effective way to avoid the trouble that this can cause. You can get several forms of small business credit. The most common source for many small business owners is credit cards. Many actually started their companies using this sort of financing. There are advantages to credit card financing. It's easy to get, unsecured, flexible, and many vendors accept them.
The problem is that credit cards aren't usually the best source of credit for a small business. They are relatively expensive, have short duration payoff terms, and a larger problem for many businesses, have relatively low limits. It's difficult to finance large capital expenditures or major expansions using credit cards in most cases. Credit cards definitely have their place in small firms, but they're better suited for smaller expenses, such as travel, fuel, miscellaneous materials, and other similar purchases.
Far better in most small business situations is a line of credit. It has many of the same advantages of a credit card, such as flexibility, and only paying for funds you actually withdraw. It is basically a reserve pool of funding your business can access as it needs. Common uses are for seasonal inventory purchases or staffing, vehicles, machinery, large capital projects, and other large, extraordinary expenditures.
Lines of credit are available in either secured or unsecured varieties. As with most other sources of financing, secured lines will have a lower interest rate, but you will have to, as the name suggests, secure the credit by providing collateral. This is traditionally done using some type of real property. In the case of most small businesses, the owner(s) home is far and away the most common source of security. While this does buy a lower interest rate, having one's home on the line, with all the stress it can entail, is no free lunch. In many cases, the business's assets can be used as collateral, but in the case of a relatively new business, there may not be sufficient assets for this to be an option.
Unsecured lines of credit avoid having business owners sign away the rights of any assets for collateral. They should make an analysis to determine if the additional interest expense makes this a viable alternative. In many cases the strength of the business will render the difference in the interest rate relatively small. If the company has proven itself over time, and has a solid history of profitability, an unsecured line of credit will probably be the preferable choice.
There is no doubt that credit is the financial grease on the skids of companies large and small. The largest multinational corporations use it every day to run their massive operations, and many of the smallest neighborhood shops do likewise. Will you choose to take advantage of it to grow your business and increase your profits? That's a decision only you can make.
Discover how to make credit work to grow your business and increase your profit. Find out how at the
Unsecured Small Business Line of Credit Guide.
