Credit crunch suffered by small businesses can be overcome

Evidence indicates that the pandemic induced credit crunch is the worst in history

credit crunch

There is considerable concern about the duration and severity of the credit crunch caused by the current financial crisis. Evidence indicates that the pandemic induced credit crunch is the worst in history. Economists generally define a credit crunch as a significant contraction in the supply of credit reflected in a tightening of credit conditions.

Small businesses may be particularly vulnerable to a credit crunch.

Small companies do not have access to the capital markets. Thus, their sources of external financing are much more limited than large corporations. If these sources shrink, small businesses could be adversely affected.

How do small firms obtain external financing?

The largest source of external finance for small businesses is commercial banks. However, small business finance is more complicated than this for two reasons. First, there are many different types of financing – even different types of bank financing. There are also other sources of financing in addition to banks.

Here are 4 reasons why businesses should borrow money to avoid a credit crunch. It is not just a fact of business life; but is often a shrewd choice.

  1. Start up costs have to be paid

A successful business has to borrow money because before a single sale can be made, there needs to be something to sell. Every business needs some form of investment before it can start trading. This could be as simple as a computer, a telephone and an internet connection. But most need more: stock, premises, marketing and something to pay the staff, even if it’s a sole trader.

The money for this could come from a personal loan taken out by the business owner or other flexible sources of finance such as credit cards. The money may even be borrowed from friends, family or effectively from the business owner themselves.

  1. Working capital is needed to keep cash flowing

Typically, suppliers need to be paid before customers settle their debts. This puts continual pressure on cash flow. To keep this cycle moving, and to avoid running out of money, demands that a certain amount of money is available to the business at all times — working capital.

Over time, the business can finance working capital out of profits, but this only comes after a period of successful trading. If the business is growing quite fast, the capital required could always be ahead of the surplus generated from trade, meaning continual borrowing is needed.

  1. Use the investment to make more than it costs to borrow money

This is one reason why many firms of all sizes continue to use credit, even when they’ve been trading for years. They use the funds to generate enough profits to more than cover the cost of borrowing.

Taking out credit, whether it’s a business loan, invoice finance or an overdraft, allows them to invest in more sales, creating more profit. Successful businesses spot opportunities in the market and borrow the funds they need to seize the moment.

Asking how much it costs to borrow money is often the wrong question.
The right question is: “What is the difference between how much you can make and how much it costs to borrow?”

  1. Borrowing money reduces personal risk

It may seem odd for your business to borrow money when you have already got personal savings. But you saved that money for a reason — perhaps to fund children through education or provide for your retirement. Whatever that reason is, if you tie up that cash in your business, it’s not available for the original purpose. Taking out credit for your business offers a number of benefits and can improve your chances of commercial success.

Most financial institutions and non-traditional lenders disclose their minimum requirements for lending. If you meet a lender’s minimum qualifications and want to see estimated rates and terms, you can pre-qualify for financing. But pre-qualification is not the same as putting in an application for personal loans. You may pre-qualify for a loan and yet your loan application may be rejected once you put in a formal application – and the more formal personal loan applications you put out, the more the impact is on your credit score.

This is one good reason why you need to work with trusted loan specialists like those at iCompareLoan. Our Loan specialists are able to not only pre-qualify you with multiple lenders and compare rates and terms, they are also able to get you the best personal loans which has costs and payments that fit into your budget.

To lower the cost of borrowing, try to convince your lender to give you a better rate. You should negotiate with your lender and they may be willing to cut the interest rate to secure your business, and so the loan will cost you less. If you are uncomfortable about negotiating, you should engage the services of a loan specialist.

Loan specialists will not only be able to negotiate a better rate for you, they will also be able to help you compare the best personal loan offers from among the different ones given by the many banks. It also makes sense to engage loan specialists because their services are usually free.

Written by Ravi Chandran

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