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Education
Small businesses need credit
Small business credit benefits
Beyond the reasons mentioned above, credit is important
to small businesses for several reasons.
• Better purchasing opportunities: Small busi-
nesses with access to credit can take advantage
of opportunities when they become available. For
example, a supplier might offer a temporary steep
discount on products or services that you regular-
ly use in a business. Of particular note is that mer-
chants and other small businesses are more likely
to do more business with whoever provides them
with credit, helping to establish a long-term busi-
ness relationship between creditor and borrower.
A line of credit gives the ability to take advan-
tage of such discounts when they occur, cutting
the business expenses and enhancing cash flow.
By Scott Goldthwaite • Better opportunity for growth: By reinvest-
Aliaswire ing in the business, small companies can grow
to a sustainable size. This is particularly im-
ery few businesses can operate solely with portant in the early years for the company to
cash on hand, particularly merchants that can become established. According to ScaleFac-
have periodic spikes in business, revenues and tor, 34 percent of the smallest SMBs (1 to 19 em-
V expenses. The need for additional funding is ployees) and 43 percent of SMBs (20 to 99 em-
evident based on estimates that the small and midsize ployees) use credit cards as their top funding
(SMB) credit market is half a trillion dollars. source, reinvesting profits to grow the company.
According to a study by the Federal Reserve, 64 percent of • Maintain separation between personal and busi-
small businesses experienced financial challenges. These ness credit: Owners of very small businesses can
challenges were particularly acute for startups and those be tempted to use personal credit cards and other
with smaller annual revenues. Half of small business personal forms of financing to keep their busi-
applicants secured less than the full amount of credit nesses running. While that might be unavoidable
requested, affecting their ability to meet expenses or grow. as a business starts, it's important to separate per-
sonal and business finances. Mixing the two could
"The challenge for many small businesses is that cash is put you at risk if your business is ever in trouble.
the lifeblood of a company," said G. Gerry Hays, professor
of venture capital at the Indiana University Kelley School • Easy access to long-term, emergency funding:
of Business. "You have to have the money needed to pay Personal finances are not a good long-term source
rent, employees and to pay yourself, or you're not going to of funding, Hays pointed out. In addition to giving
be in business very long." the business the ability to take advantage of avail-
able discounts, the availability of credit on known
However, merchant cash income will typically terms helps businesses when they have unexpect-
lag cash outflow because the company starts ed expenses, such as a prime piece of equipment
paying rent, acquiring inventory and incurring other start- failing, late payment from a supplier or a myriad
up business expenses before making the first sale. Payroll of other reasons. With ready credit, the business
is another expense that, at least in the early going, may doesn't need to scramble to pay to get the equip-
need to be paid before enough revenue from sales covers ment fixed or handle other short-term emergencies.
the expense. And, as Hays mentioned, the business owner
will want to be able to pay himself or herself as well. • Establish credit history for future use: A busi-
ness needs to establish its own credit history and
credit score not only to help protect a business
owner's personal assets, but also to obtain better
rates and have higher credit availability in the fu-
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