Many Small Business Owners tend to say “I am doing well, I do not need any credit or lending products from anyone.” As a credit professional with more than 9 years of experience, I advise you to think twice before saying that.
While your business is growing and generating the income you deem satisfactory, you need to have an eye on the future because, guess what, the moment you finally do need a loan is usually the hardest time to actually get one!
Meet Sergio: Sergio has been doing great running his Wholesale business during the last 3 years and selling his products on the shelves of major retail stores. Just when he thought all was going well, other competitors started to enter the market, utilizing technology and new cost-cutting initiatives in transportation that led to downward pressures on prices. Sergio’s clients, accordingly, pressured him to provide lower prices, or else run the risk of them switching to his competitors and ultimately hurting Sergio’s business. Sergio’s profit margin and net monthly income started to suffer.
The margins affected his bank statement balances and a downward trend was witnessed in his financial statements. Sergio had also drawn more funds from his credit cards to support his cash needs until he found the suitable solution, which adversely affected his Credit Report and FICO score.
Always remember that a lender will utilize your last months of bank statements, credit reports, as well as your usage percentage trends on high interest credit lines to determine your financial stability and capacity to make payments on time. In this case, the following will be witnessed:
- Increased usage of credit cards compared to past months representing that Sergio was in need of funds no matter how high the cost of these funds was
- Decline in Bank Statement balances representing that Sergio is utilizing old savings generated by his business and NOT generating additional value and cash from his business
- Decline in deposits due to the entry of competitors and Sergio losing at least SOME of his clients is evidently noticeable
Final Credit Decision: Due to the above reasons the probability of Sergio receiving the funding he needs would be VERY SLIM.
Conclusion: as small business owners looking to sustain or grow your business, you must:
- Ensure you forecast for the possibility of running into issues like Sergio and build a relationship with a lender who would be willing to help sustain and grow your business if and when needed
- You must always ensure you maintain a good cash cushion to cover for weaker months or a decline in business trends for any reason
- Try to maintain a revolving business credit line, such as a line of credit, to ensure you can use that to cover your business needs for a short period of time until you resolve unforeseen issues or find an cheaper option to finance your business needs