Not many may realize it, but credit is important for businesses. Those who don’t know much about running businesses tend to think a good business is one that does not have any debt. That is definitely not the common case.
Only a few businesses start without credit and continue operating for years without ever incurring debt. Credit is important especially for small and medium-size business. Access to SMB credit sustains operations or supports growth for many businesses.
Learn more about the importance of small and midsize credit in the discussions below.
Initial and working capital
As mentioned, not many businesses start operating without resorting to borrowing funds for capital. Starting a business with credit is not bad although it’s always preferable to commence a business without debts.
Capital can refer to initial capital (the funds used in the establishment of a business) or working capital (the funds used for operations). The initial capital is spent on the acquisition of various requirements in starting a business. These include the rent for the site (or the amount to buy the site), the cost of the equipment that will be used by the business, the cost of supplies needed by the business, and the cost of having utilities installed.
Working capital is more the funds needed to continue the core operations of a business. Basically, it is the asset used to produce more assets. It is used in obtaining supplies for a production business, paying wages and salaries, and paying other expenses such as the utility bills, among others. As the phrase infers, it is the capital used to make the business work or operate.
Not every business enjoys smooth flowing operations. Some encounter bumps that lead to the lack of cash necessary to further operations. Sales may not be doing well, or receivables may not have been collected yet, so the business is running out of cash.
Being unable to pay the salaries of employees is particularly problematic for any business. Supplies can be purchased on credit, but employees cannot be made to work without regular payment. That’s why it becomes necessary to resort to credit to obtain working capital.
Generally, it does not make sense stopping a business or declaring bankruptcy upon encountering cash shortage. This can happen occasionally to businesses and there’s a good chance that business will return to normal or even improve as long as the business continues operating. That’s why it makes sense using a business credit line to be used for working capital.
Credit can be used to fund the expansion of a business. Often, when opportunities for growth emerge, businesses don’t have enough funds to grab them. It’s only sensible taking a loan to expand operations. This expansion can be the opening of a new branch in a profitable location, the production of a new product line, or the purchase of assets (whose prices have plunged) that can be considered essential for the expansion of a business in the future.
Even businesses that continuously turn out profits and growth may require credit to fund expansion. The cash accumulated from operations may not be enough to adequately finance an expansion. It would be a waste to forego an opportunity to expand simply because the business has not accumulated enough cash from the profits of operations yet.
The prevailing atmosphere of business competitions at present requires decisiveness and dynamism. If a business fails to react promptly and appropriately, many competing businesses are there to take away opportunities. Having enough cash to support expansion is particularly difficult for small and midsize businesses, so it’s an advantage having a business credit line.
There are instances when it becomes necessary to hire more employees to meet growing demands, especially in the case of manufacturing businesses. Unfortunately, many businesses usually don’t have enough funds to hire more people. It may be necessary to obtain a loan to be able to hire more people to support increased production or meet a greater demand.
As mentioned, it’s easy to meet increased demand when it comes to supplies since supplies can be obtained on account. Labor, on the contrary, has to be paid on time and sufficiently to make sure that production proceeds as expected. Unpaid or underpaid employees are a bane for any business. These employees may sabotage operations or reduce the quality of their work to protest the lack of, or delays in, their wages and salaries.
Things don’t always go as expected for businesses. There are times when accidents or emergencies happen. The production of a product line may turn out to be defective and rework is needed. Accidents may occur that affect supplies or the products in stock. Similarly, accidents may affect other resources of a business such as the equipment, machinery, or the employees. The products being delivered to a customer may have been damaged while in transit. There are many things that can disrupt business operations.
To cope with these unexpected events, it becomes necessary to obtain a loan for the business to continue operating. Some problems may be covered by insurance, but the processing of insurance claims may take time. The business may need to do something as soon as possible to make sure commitments are not affected and to ensure that good relationships with clients are maintained.
Research and development
Moreover, there are times when it’s necessary to allocate funds for research and development. This is especially true for businesses that seek to offer promising new products. It would be more costly rectifying problems that emerge because the new product released has resulted in problems (due to lack of R&D work), as compared to going through all the necessary steps to make sure that the new product being offered is safe and is true to what it is purported to be.
Access to credit for small and medium-size enterprises is generally necessary. Only a few businesses can manage to sustain operations and grow without using credit lines. It’s important, however, to make sure that credit is properly managed.