A 2010 survey from the Small Business Association shows that 80 percent of small businesses use some type of credit. Lines of credit, therefore, are extremely important to the success of most small businesses. A closer look at the way businesses operate quickly reveals why so many businesses need access to credit.
How Small Businesses Use Bank Credit
Bank credit usually comes in the form of a small business loan. Businesses often use these lines of credit to expand, explore new areas of their industry, acquire another company, or pay employees. These are essential to the overall success of a business. Even if a business owner does not want to grow her company to take a bigger portion of the market, the business still needs to keep up with the latest trends. Any organization that falls behind runs the risk of failing. Considering how fast technology moves, businesses need to keep a close eye on what their target markets expect. Without access to a business loan, however, the company might not be able to keep up with competitors.
How Small Businesses Use Trade Credit
Trade credit does not come from a bank or lending institution, but it plays a vital role in the success of many businesses. For instance, a retail store that needs to buy new inventory might not have enough cash on hand to purchase the items. The wholesaler, therefore, extends trade credit to the store. This allows the retailer to keep products on its shelves without paying upfront for the items. The retailer, of course, has to pay the wholesale company at a later date. By this time, the small business will hopefully have made enough money selling the products so that it can afford to pay.
A lot of businesses rely on this type of credit, including restaurants, retail stores and contractors. Without trade credit, the small businesses would never have enough money to buy the products they need. Another benefit of trade credit is that it helps businesses avoid high interest rates that often accompany loans and credit cards.
Is Business Credit a Good Thing?
The SBA has found that businesses operating without the help of credit actually make more money than those that rely on loans and trade credit. Small business credit, however, is not always a choice. Business owners have to keep up with their competitors and their customers’ demands. Small business credit, therefore, can seem like the best thing when it helps a company succeed. When used improperly, though, it can create financial burdens that cripple businesses from moving forward. Businesses, therefore, have to pay close attention to their finances so they use their credit wisely.
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