Small business owners need funding to boost activity or simply to be aware of any liquidity needs that may arise.
The banking offer in this field is extensive, having products and services that stand as gloves in the most varied needs of small business owners. However, a wrong choice can complicate the life of the small business owner, either because it will limit access to credit or simply because it may create obstacles to the financial balance of their accounts.
In these terms, there are 3 golden rules that all small business owners must respect when they decide to finance their business with credit.
Short-Term Credit for Long-Term Needs
Short-term financing should be used for short-term needs such as those caused by difficulties in receiving. Also purchases made with settlement forecasts in the short term should be supported with short-term credit.
All financing with a repayment period of up to 12 months or whose associated credit line has turnover characteristics is considered for the short term . Therefore, loans for short-term activity can be, checking accounts, factoring, overdraft facilities, discount of effects, among others.
One of the mistakes that many small business owners make is to use these loans for investments in the company, for example, acquisition vehicles, industrial machines and even construction and remodeling of facilities. This decision violates the golden rule of financial management which tells us that the capital used to finance the assets must have a maturity equal to or greater than their economic life. This brings us to the second golden rule for small entrepreneurs in credit.
For Long-Term Needs … Make a Long-Term Credit!
As I mentioned earlier, many small business owners use credit available to finance short-term needs in long-term assets, when they should be financed with loans maturing at or above their economic life.
The day will come when there is no credit to support the activity of the company nor will there be other possibilities of financing with banks due to exceeding the credit limit for working capital. Therefore, it is crucial to distinguish between short-term and long-term financing needs, so as not to undermine the company’s activity.
Most well-known loans that meet the medium and long-term needs of small business owners are leasing’s and investment loans.
Permanent Credit for Various Needs
Not everything is countable at first sight and what may seem short-term needs can easily translate into a medium- and long-term need even though it does not have such characteristics. An example of these needs is the constant financial bottleneck caused by receipts which is common environment in times and clear financial instability or reduced market confidence.
A non-receiving company does not create sufficient liquidity to meet all of its liabilities, necessitating a cushion to respond to liquidity difficulties. This type of cushion can be a credit line assigned to the entrepreneur where he can help to face the risk of the activity.
Obviously we only refer to the use of credit as a solution, however, having liquidity independent of the use of credit is also the solution to these cases.