When an SME must finance themselves even if they do not need it?


It is true that there are entrepreneurs who suffer from debt aversion, especially before credit institutions, and presume never having contracted financing. But this approach is not necessarily the most appropriate in all cases.

Among other things because not all entrepreneurs can take their first steps without funding. Once the “startup” phase has been overcome and the company is already growing, the excess of indebtedness may become so negative that it may compromise the fulfillment of the company’s obligations, such as the total absence of external financing.

It may seem that having debts can not have anything positive, but it should be remembered that we are talking about who generates that debt without a pressing financial need and therefore will not have problems paying it. The negative nature of the debts, obviously, manifests itself when there are difficulties to pay them.

Companies go through situations, more or less usual, in which financing is necessary, although it could happen without doing so. Next, I will detail the most common and why.

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Credit history and seasonal demand peaks

To start, because in prevention of a future need to resort to financing due to specific cash stresses, or simply because one year the business may not go well, the fact of having a credit history without incidents is very important. More so, than not having a credit history.

Without this record, when the time comes, it will be more difficult to obtain the confidence of a credit institution at a time of economic weakness of the company, and even less, being committed the patrimony of the partners, which is what until that moment had held economically to the company. However, with a positive credit history, it will be more accessible, and there is no better time to generate that history than when the economy is healthy.

Another case in which financing is convenient, occurs in companies that have peaks of seasonal demand. Financing to better meet this increase in demand favors short-term income and can make the financing more profitable.

I have experienced situations in which the employer did not face a peak demand for not getting into debt, having promissory notes due in a drawer. It is absolutely more profitable to discount those promissory notes and meet the demand of customers, than to remain in financial inaction. And not only financially speaking, being able to attend demand peaks or not, it directly affects the image of the company. But that is another subject.

You may also like to read: In SMEs it is also growing as a worker

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Investment and expansion

We can not forget the cases in which the company makes investments or expansions that are accompanied by an increase in the number of employees. The increase in working capital is a risk to the treasury, which can be seriously affected if this project takes time to offer profitability, stagnate, or simply fail.

That previous successes do not guarantee future successes is a maxim that we should not forget and finance in these cases is almost mandatory even if the employer has a feedback that suggests otherwise. There are also frequently cases in which the opportunity to finance is presented because interest rates are down.

When this happens, there is no doubt that we are facing a good investment opportunity, but beware, it is not advisable to acquire an asset that is not absolutely necessary for the development of the activity or is planned for later. We can find, for example, machinery that we do not use and a debt to be amortized.

Opportunities are so named because of their opportunism, so they must match that possibility with the planned plan, and not be a cause of precipitating events, something totally inadvisable in the financial field.

Finally, and this is an error that has been committed with some assiduity in periods of bonanza, companies with a significant volume of idle liquid assets, decide to invest in real estate, whether local, offices or homes, and do not go to financing. No matter how good the current economic situation, 150,000 dollars today will always be much more money, inflation through, that amount with fixed interest amortized over the next fifteen or twenty years.

In this sense, we must pay attention to the accounting fact of amortizing the investment while paying, even, in many cases, before. Having said all of the above, each case is unique and each company has nuances that make it different from the others. That is why I believe that every SME deserves its study and a rigorous analysis of its financial situation.

Therefore, it is important to determine, in case of deciding to resort to financing, whether this will be a long or short term, whether it will be a loan or line of credit and what amount to request, whether the total investment or only a part.