Trade and credit have been inseparable for thousands of years. Information on first loans is not provided by financiers but … archaeologists. For example, they found credit documentation before our era! The interest rate on the loan, by today’s standards, seems to be quite attractive: less than 4%.
Although credit is such an age-old institution, many of us are strongly against credit refusal. Is it always right? Let’s look at a few reasons why entrepreneurs are giving up credit.
My business is too small to get a loan
If your company has 20-30 thousand dollars of monthly sales and 4-5 thousand profits, then it is probably too small to get a half-million-dollar loan – but do you really need half a million? The credit needs of companies are usually proportional to their scale of business, so small businesses need small loans. If your profits and revenues are stable, then why should you have a problem repaying, for example, USD 50,000 in loans during the year?
However, it is hard to deny that for small entrepreneurs, applying for funding can sometimes be a torment. The problem, however, is usually not the size of the company as such or the creditworthiness, but rather the problems with showing creditworthiness.
Small enterprises or self-employed persons are a very diverse group – it is difficult to assess according to uniform criteria. In addition, they are people who live in eternal misery and are therefore reluctant to excessive formalities. And no wonder: if you are a salesman, purchaser, marketing specialist, and investment manager in one, it’s still hard to find time for papermaking.
This is one of the reasons why micro-entrepreneurs “bounce off the doors” of banks that like diagrams, indicators, strict procedures, and detailed documentation. Micro-entrepreneurs usually don’t have the time – or even the opportunity – to provide banks with the information they need to demonstrate their creditworthiness. And this very often is a real problem.
Fortunately, extensive documentation is not always needed. We would not like to have an intrusive promotion on this blog, but … let’s put it this way: at Good Finance we can assess creditworthiness without any formalities.
Taking out a loan will hurt my company’s reputation
This is a fairly common fear, but is it justified? Indeed, we know the expression “live on credit”, and hearing “borrowing money” can be associated with patching the household budget at the end of the month. However, credit should not be associated with financing whims or a last resort in financial trouble. It can also be – and even should be – a tool for business development.
When thinking about reputation in the context of credit, you should not succumb to stereotypes. Look at it this way: credit in many respects is the same transaction you make with your contractors. If you meet your commitments, your image will strengthen. If you are late in delivery or the goods you sell are of low quality, your reputation suffers.
Similarly with credit: delays in repayment negatively affect your perception of your company. In addition, this applies not only to the current creditor but also to potential future lenders who will learn about it from Credit Checker.
Fortunately, Credit Checker can very well prove your reliability, if only you pay the installments on time.
So what should you do to avoid getting into trouble and your loan is good?
It’s simple: approach the loan the way you approach business. Responsibly. Credit can be a great tool for business development, but – if the commitment is too high and your plans don’t burn out as well as it had assumed too optimistic scenario – it can also become a burden.
Therefore, when taking a loan for the purchase of goods, for example, draw up three sales scenarios: optimistic, neutral and pessimistic. If in the pessimistic variant your income still allows you to repay the loan, it is worth using it.
High loan costs
“Credit is expensive” – we can often hear as a reason for giving up this form of financing. And in many cases it really is. But … this does not necessarily mean that the loan is unprofitable! For an entrepreneur, it is not only the price of the loan that counts but also the income that you can generate thanks to it.
Let’s take a simple example: you have the opportunity to buy a cheap product for 20,000. You know that it is a salable product and an attractive price: you could easily sell it in 2 months, with a profit of purely 20%. However, you only have reserve funds for unexpected expenses. You don’t want to touch them (rightly!), Buying for cash is not an option.
So you go to the bank, where it turns out that the loan is expensive, with a commission of 5%, interest rate per year 10%, additional insurance 0.5% of the amount of credit used monthly and an early repayment fee of 5% in the case of repayment during the first 6 months.