The life of small businesses and enterprises is usually shortened by an inadequate administration, where the use of credit plays an essential role.
To prevent it from happening to you, you must be certain of when your business needs to be pushed through financing so that the debt acquired contributions and does not subtract. It is time to think like a manager and analyze your environment to make a wise decision about your company’s financing. How to know You can guide yourself with these scenarios:
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But remember that growing is not only about increasing inventory, but thinking about other aspects such as the number of workers, new tools to manage the business, some technology to streamline records, among many other needs.
Sancho recommends using indebtedness mainly for working capital and inventory, which is to say that machinery and equipment should be mainly funded with savings and/or profits. Although “this does not mean that you cannot use debt to acquire this equipment, we only say that the most convenient thing is that your business must have the capacity to assume that type of investment,” he says.
Your market demands rapid growth
This answers to an unforeseen situation that suddenly pushes demand for your products or services. For example: suppose you have a small restaurant and it turns out that a new company with a large number of workers will be installed nearby, those who will demand food and do not have enough resources (utensils, furniture, space) to respond to potential new customers.
In this sense, Joseph Sancho, Master in Finance from the Pro Muler microfinance institution, recommends analyzing opportunities and threats in your environment:
When there are more opportunities than threats, it is a good time to grow and think about financing since you can do business with your existing clients and certainly new prospects, but without the contrary, threats are more prevalent than opportunities, then it would not be good time to borrow and instead, you should consolidate with what you have, ”he advises.
The infrastructure needs to be improved
Expansions, remodeling or repairs on the premises require very important disbursements that, if not done correctly, could undermine the business. Credit is a viable option to cover all or part of these investments.
Identify a new business opportunity
In the day to day additional business opportunities may arise (linked or not to what you already do) and many times we do not enter them due to lack of capital. In this case, a credit could allow you to take advantage of this new opportunity, but you should always contrast the profit margin that the new business will leave you versus the cost of the credit.
In this case, before entering a new market where you offer your same products or new products, it is advisable to perform a cost-benefit analysis.
It is a simple process where you must include all the costs incurred in your product or service (including acquisition or production costs, taxes, transportation, among others). Once this has been done, you must estimate how much you expect to earn in order to set the selling price.
Remember that this should not be an appetizing number but you should investigate the price of other competitors in the market, taking into account the similarity in the characteristics of the product of other competitors, geographical area, accesses, etc. Highlights the ProMuler specialist.
Do you want or need to give credit
Suppose a large customer emerges, who is going to demand large volume but asks you for a month of credit for each delivery, are you able to grant it? Remember that while that payment is on hold, your business has to face fixed expenses such as basic services, personal, local payment, replenishment of inventory among others, which often does not allow to give such concessions, but … you are going to let loose that big customer? For situations like this, you can apply for a loan to increase your working capital and grow.
If you have made the decision, you must comply with a basic rule: the term you give to your clients must be shorter than the term given by your creditors (financial institutions or suppliers). For example: if you sell a product that needs packaging service and you pay a supplier to do it and this provider gives you 60 days credit, you must grant your customers a shorter term, say 30 days, so make sure you count with liquidity to be able to pay your supplier and, if your client is late, you can have a margin of days to manage the recovery of your money before the date of paying your creditors arrives.
Whatever your case, you should remember that taking credit is a great responsibility and should not be decided lightly, so we remind you of the 5 rules to follow if you are looking for a loan to invest.
A fundamental issue when applying for a loan is the decision of what to invest in. Small businesses generally require working capital, since this type of investment helps boost their business, generating greater income to achieve stability; Then you can start thinking about fixed assets to improve the conditions of the venture.