Business credit is to make money from it! And the point is that a bank or a loan company should earn, but the entrepreneur himself. Meanwhile, many entrepreneurs do not notice that credit can bring them additional income.
If you’ve been in business for a long time, you’re probably enjoying stable income. Current sales allow you to buy more goods or materials for production, and the profit earned allows you to live at a reasonable level, and perhaps also to gradually increase the scale of the company’s operations: step by step, step by step.
Entrepreneurs … don’t need money?
However, have you ever wondered if you can accelerate your business development by leaps and bounds, not gradually?
And the correct not “if” but “how” to do it?
For example, can you buy half the item by the day if you have too much of it? Can you open another store from quarter to quarter? Purchase a new machine or hire additional employees to deliver the product to those customers whom you are now sending away successfully because you are barely making up with current orders?
You probably can’t do it because you don’t have the money to do it. The overwhelming majority of Polish companies (96%) are so-called microenterprises. And the vast majority of them – about 3/4 – in the last year used only their own funds for the functioning and development of the company.
More than half of micro-entrepreneurs mention the lack of such a need as a reason why they do not reach for a loan. I suppose, however, that if they were asked if their company could grow faster, they would say that if only they had more funds for development.
Small enterprises, i.e. companies that have already grown over the “micro” stage, use loans much more willingly. Almost 50% of them are supported by external financing. This is probably one of the most important reasons why these companies have just grown up, and the rest – micro-enterprises.
Question about profitability
So if you see the prospect of sales growth, and there is a lack of funds in the way, a working capital loan is a great way to use it. Of course, you can – and must – ask if it pays to take a loan.
The answer to the question of whether it pays to take a loan to buy goods or materials is not complicated. If the cost of the loan is lower than the margin you will realize on subsequent sales, the loan is profitable. Of course, everything within reason: if the cost of credit is USD 1,000 and the margin is USD 3,000, then for a price of USD 1,000 additional costs we receive USD 2,000 of additional profit.
On the other hand, if the cost of credit is USD 1,000 and the margin is USD 1,100, then USD 100 is unlikely to justify any additional effort or some additional risk associated with the loan.
Is there a risk?
It can be said that the loan increases, usually by several percents, the purchase price of the goods. If the sale does not go as well as the entrepreneur planned, the realized total margin will be lower. In the pessimistic version, it will not even compensate for the cost of buying the goods. When buying goods, you should always make a sound estimate of the possibilities of selling it and do not get overly optimistic. When purchasing on credit, the margin of error is simply correspondingly smaller.
Entrepreneurs who are not afraid of credit and know how to use it effectively often mention an additional barrier: low availability. Indeed, around 1/3 of micro-entrepreneurs are checked-in from successful banks.
The problem is even greater because it is difficult to say that it would cost nothing to submit an application. Yes, it costs time. The collection of documentation required by banks can be very absorbing. And the time from the first visit in the window to the credit decision sometimes counts even in weeks – who can afford it?