Credit Management: The Key to Growth

We all know that it takes money to make money, but it’s also important to remember that money costs money, especially when you run a SME. One of the biggest cognitive realignments a business owner must face is the realization that managing their business’ finances is a different beast to managing their domestic finances.

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Credit management is a vital skill when running a business, but some companies are better able to handle their credit management than others.  In a time of historically low interest rates new business owners can feel like kids in a candy store of cheap (or free) credit, with the commercial sector saturated with 0% finance and fixed term interest-free credit. It’s important to remember that there is always a cost to credit. While companies like Capital Alliance can be extremely helpful in mitigating the cost of credit to the fledgling entrepreneur, it’s still vital to know how to box clever when managing your credit.


Through fluctuations in the market and economy, you need to know how to make the whims of the financial climate work for you.

Inflation/price increases


Just like when your store offers half price OJ, you should aim to “buy now while it’s cheap”.  Shrewdness is important but investing when prices are at their lowest (even if your cash / credit reserves are low), will save you money in the long term, especially if the investment has a fiscal multiplier attached (something that will, in time, generate more revenue than it costs).


Cheap credit vs expensive credit


We’re naturally drawn to cheap credit, but when you’re dealing with banks, the house always wins, so go in with your eyes wide open. Many have shrugged off impending rises in interest rates, assuming that their business will be in a stronger position when the time comes, but in an unstable economy it’s best to hope for the best and plan for the worst.


The costs of credit


Nobody wants to think too hard about the cost of late payments, interest or fees, but you’re courting danger if you omit them from your annual budgeting.  Make sure your interest rates are forecast in advance and you’ll be spared any nasty surprises.


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Credit and liquidity


Keeping on top of credit is important but sometimes it’s better to burn the plastic than deplete cash reserves. One way in which business finances actually differ little from household finances is the importance of setting aside cash for a rainy day. Cash is liquidity and liquidity is cash, and you don’t want to let an opportunity for growth (like a bargain batch of stock or an unmissable new premises) pass you by because you don’t have the liquidity to move on it.


Credit worthiness and risk taking

Unlike household finances, where credit is usually used as a last resort, credit is a vital part of business and managing it is one of the most reliable pathways to growth. It’s a difficult balance between acting on fluctuations in the market without tying up all of your capital in stock, or taking advantage of low cost credit while staying wary of hidden costs way down the line. If you can manage it, though, you’ll be able to boost your credit score and take the calculated risks that will lead you to sustainable growth!

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