Access to Credit – A Blessing or a Curse?

At NH Business Consulting, we believe that credit plays an important role in the financial health of a company. Credit provides flexibility to meet obligations for accounts payables, payroll and significant purchases of equipment, land, and premises. When the timing of cash inflows does not match outflows, credit is an excellent tool to have at your disposal. However, access to too much credit carries the risk of overleveraging yourself personally and your company.

Years ago, credit was only available through bank loans. Access to credit was more difficult due to strict approval processes and more structured terms for repayment. Although frustrating for small business owners, these conditions limited businesses from overleveraging. 

Today, small businesses source credit through business credit cards which have exploded in terms of availability, size of credit limits and costs. 

Banks offering these cards have automated much of the credit decision-making process, reducing their costs for offering credit to the public. Banks also charge high interest rates for this type of credit and if you only make the requested minimum monthly payment, your debt load will take years to repay. During that time, your limit may increase regularly through digital reviews of your credit record. The better client you are, the more credit may be offered to you. 

Invariably, businesses have easy access to large lines of credit through multiple credit cards. When pooled together, this credit availability is often way higher than what most small businesses can afford to take on.  Tag onto that government loans made available during the pandemic with limited credit assessment and long repayment tails. As a result, businesses today have been bombarded with excessive credit availability and unfortunately, if tight on cash or facing difficult times, many now have very large credit balances which may take years to fully pay off.  

Considering the various economic challenges faced by companies over the last 3 to 4 years, debt repayment is further hampered due to weaker cashflow positions and dwindling savings in America. Yes, your newest credit card gave you more time to deal with challenges you were facing, but what do you do next time? Borrow against another credit card? Take another government loan? Is this in your best interest? Business owners are now trusted and expected to self-regulate their use of credit. Many cannot do so. For them, the better question to ask is why their company constantly requires higher credit availability to function. 

At NH Business Consulting, we would be pleased to guide you through a proper assessment of your credit needs and help you break the cycle of excessive credit use and associated costs. Reach out to us for a free consultation.