When comparing loans to companies and focusing on their costs, it’s easy to lose sight of the fact that credit should primarily have a positive impact on the company’s profit. And it is not only about reducing its costs, but also about the fact that credit increases revenues.
Job advertisements in family or small businesses almost always start with the words “in connection with dynamic development”, but often these words are a bit exaggerated. The purchase of new laptops for the office, the new customer gained, the increase in sales by a dozen or so percent during the year certainly testify to development.
A chance for rapid development
Rarely which company fully realizes its sales potential. Being able to sell or produce goods for – for example – USD 100,000 a month, it stops at half that amount. Often, there is a shortage of funds. Additional goods or materials simply need to be bought, while current revenues do not allow it.
Few take advantage of this opportunity, however: only one in four small entrepreneurs. On the one hand, it is sad that micro-enterprises are not looking for ways to grow, but on the other – it is a greater chance for the agile to gain a competitive advantage.
When to support yourself with a loan?
The answer to the question when to use credit as a way to finance your purchase is quite simple:
when the loan costs will be lower than the benefits you will get from it and
when you manage to sell additional goods with a high degree of certainty
Economists calculate the cost of credit in a rather sophisticated way, but for small businesses a piece of paper and a pen are enough. Nothing more is needed to compare the margin with the sum of commissions and interest. If these costs are lower than the margin, the loan will pay off.
Of course, the excess of the margin over the cost of the loan must be large enough to justify the effort put into obtaining it and some of the risks associated with it.
If the cost of credit is USD 1,000 and the margin is USD 3,000, then USD 2,000 of additional profit is probably worth the extra work. However, if at the same costs we can count on an additional earnings of 1.1 thousand USD, then the profit from the entire operation drops to just one hundred USD.
And this is probably too low an amount to fight for, and certainly too low – to justify the additional risk. What?
Exactly the same that we bear when buying any goods: that we will not be able to sell it at all or in the established. In the case of credit, the risk is even higher because the credit actually increases the cost of the purchased goods. The margin of error is therefore smaller.
The key to success is therefore the right plan: don’t just assume an optimistic scenario, see what happens if the pessimistic scenario comes true. Even if the sale is “going out” or if the loss is acceptable, it is worth reaching for a loan.
Of course, many entrepreneurs will protest: so what if it is worth it, if the banks dismiss many of them with success? Indeed, as many as 1/3 of micro-entrepreneurs are refused credit. And this means quite real losses: of time. The time you spend on collecting documentation, visits to the ward, filling in forms.