Is Running Your Business On Credit Wise?

Being a business owner is a dream many people have. When they finally do it, they are proud and they want it to succeed. However, there is a time when a business owner has to advance the business and they need the revenue to do it. This causes them to look toward financing and other forms of business credit to make things happen.

There are reasons as to why a person may want to acquire business credit. Business credit helps you acquire merchandise and gives you a leg up when you need it. In some cases, business owners will run their business on credit so they can move the business forward, such as the business owner using their credit to hire employees so they can do more work on the business.

Business owners will also use credit to free up some cash to work on marketing. To free up this money, they will use credit to purchase their inventory. This can be wise if you advance the business to the point you can pay off the credit balances, but, of course, you don't know what the future has to hold in regards to that. All you have is faith and hard work to back up your expectations.

As A Growth Strategy

Using credit as a part of a growth strategy can be effective. One reason why some businesses do not succeed using credit is because they do not have a solid growth strategy. Credit cannot be paid off without that growth strategy. This means setting aside some time to experiment with different advertising and marketing strategies to find what works best for you and using your credit only when you need it.

When you do use your credit, it is best to put a short-term purchase on the card. Many experts recommend not using a credit card for business purchases unless you can pay off the balance when the next payment is due.

A study performed in 2009 by the Kauffman Foundation showed that accumulating credit card debt reduces the odds that the business will survive. For every $1,000 in credit card debt the business has, the likelihood it will fail increase by over 2 percent. This is why it is very important to not go into actual debt when using credit to run the business.

For those businesses that are in debt, it is imperative to get out of debt as fast as possible. A study found that the most successful businesses can manage their debt quickly because they keep it at a stable level. In fact, they can handle their debt within a matter of a few years.

Cost-Benefit Analysis

When desiring to use credit to give the business a boost, it is best to do a cost-benefit analysis. For instance, you may find that hiring someone, especially when that is going to cause you to use your business's credit, may not be the best investment.

To make this simpler, assume that you want to hire someone to help at your store for just 15 hours each week at minimum wage. If your employee makes $112 per week, you will need over $5800 to cover the employee's wages for a year.

If credit is the way you have to do this so you can focus resources on marketing, it is best to not borrow on any of your personal cards. It may be best for you to finance one inventory order that equals that employee's wages. If you want to pay off the inventory in two years, you will be looking at a payment of around $280 per month and that means over $900 in interest costs by the time you've paid that debt off. That means the cost of hiring the employee costs over $6,700.

These figures do not include any fees that are associated with the card. There are also the administrative costs that come with hiring someone, as well as the time you have to take training and managing them. Then there is the paperwork that has to be set up for withholding taxes and Social Security. You may also carry workers' compensation insurance. It is best to have an accountant set all of this up and that is a service that is far from free.

Using Credit Wise?

Once you have a handle on all of the figures, you will be able to weigh them against the revenue that the employee may bring in, as well as the additional revenue you'll be able to bring in through your marketing efforts. This will tell you if it is worth it. While it is hard to predict what your marketing efforts will bring in, you can set reasonable goals and strive for those goals so they can be included in your figuring.

If you find that it is not wise for you to use your credit, you can focus business building around times when customers are less likely to visit and spend money. Every business has peak hours and slow periods where they can work on business development. You might find that it would be more worthwhile to start your day a little early or a little late. If you need to cut back hours, do so at times when customers hardly ever come in. If you are not sure when you should work on marketing or what hours to cut, you can look at the hours of some of the successful shops in your area for an idea. If you wish to mimic their hours, that is a good way to compete for business. You will just have to make yourself known to the public so it pays off.

Conclusion

In the end, you may want to evaluate things before you decide to lean on credit. Hiring an employee is a big deal and so is using credit to shoulder expenses you currently don't have the revenue to handle. If your projections say you can pay off the debt in a month, go for it. If they don't, you may want to alter your business hours or your daily routine.