Initially, hardly somebody likes an idea to use credit and become a debtor. It is very beneficial not to be dependent on somebody and develop business using own money. But it is only illusion of stability.
If your enterprise has growth capacity, which is not realized, it will be easier for the competitors to take your part of the market. We are not able to consider actions of the competitors.
Majority of entrepreneurs has its own perception how to make business better and generate more income. Somebody who is disposed towards risk will take credit and use it for business development, and positions of other market participants can be weakened. Investment means modernization of equipment (as a result, improving of quality of goods or services), and opportunity to be expanded at the market.
However, use of credit money does not automatically guarantee benefit generation. On the contrary, inappropriately used credit can undermine financial status of the company.
It is difficult to predict such consequences in advance. Only later, it became clear whether business-plan was well-prepared or not, how clearly goals were identified, to what extent money was effectively invested.
So, is it worth to borrow, and if yes – how much? There is no general recommendation at all. Depending on area of activity, comfortable level of debt can strongly vary. Optimal indicator depends on current situation of the company, business characteristics of its managers, business strategy, trends in economy. Also, much depends of size of the company. Small and medium size companies do not have chance to issue their own shares, and allocate revenues generated from placement of securities for repayment of debts or further extension of business.
Therefore, such enterprises need seriously and thoroughly address every decision linked with attraction of borrowed money. Credit money can help your business to gain more income and strengthen positions at the market, but risk also can worsen position of the company because of borrowed funds.
What are common mistakes made in crediting?
Unnecessary purchases
Psychologically, it is easier to spend “somebody else’s” money rather those earned by yourself. Hence, risk of irrational use of borrowed money appears. Often, it seems that you buy necessary items, but, actually, they do not contribute directly to income generation, and even opposite.
Recruiting of secretaries and large number of staff, procurement of extremely luxurious office furniture and equipment and other expenditures, which are not priority, can seriously undermine financial situation of the company at initial stage.
Usually, it becomes obvious later that you could easily survive without these things.
First, to find product market
It is dangerous to invest in development of the capital assets of the company, for example, to buy equipment to increase production capacity without clear perception on how to extend base of the customers or without preliminary arrangements with them.
You always can buy equipment, but it is more difficult to find market. If investment would not attract additional customers, it is worth to procure new equipment only in case if it would lead to reduction of your costs.
Credit above the planned rate
If you have already debt burden, which size exceeds annual revenues or annual earnings in 2-4 times, you should analyze all further steps on business crediting and, probably, look for other source of financing.
Sometimes, we have to say ourselves “stop” regardless of attractive prospective could be opened through new money. It seems that the market is growing, and everything should be very good. However, it is better to focus on cost reduction under such situation. It is surprising how many credits can be taken in a short period of time!
It is not difficult to get the credits, and much easier to spend them. The hardest thing is to gain revenues with a help of credit and to pay off debts.
Miserly person pays twice
Miserliness as well as wastefulness is harmful for business. In this case, we are talking about the most useful and necessary for the company. If any procurement allows reducing your costs in several times, do not be greedy.
If you need valuable advice, which helps to avoid numerous mistakes and find out solution, do not shy to pay to these qualified consultants for their input.
First – revenues, then – loans
Credits are only complementary means for business financing. Initially, the company possesses its own assets. Business financing should be made mainly from revenues. Definitely, earnings must be sufficient for daily life, but purchase of luxurious cars and other “toys” from revenues, finally, may bring business to naught.
Lack of available cash assets
It is very risky to take credits if you do not have any money left on your bank account, or to stake everything, spending all borrowed cash immediately. Lack of any liquidity may hamper credit lending since it indicates problems in the client’s business, and not unwarranted caution of the creditor.
Wrong “time – money” ratio
Very hasty, pre-term termination of the credit may cause lost benefits. And contrary, expansion of repayment during already fixed period can also make harm to business, drawing away excess money for interest payment.