SBA Study of Small Business Use of Credit
The SBA recently issued a report on how small businesses use trade credit. The report found that 20% of small businesses don’t use trade credit, 20% only use bank credit, 20% use only trade credit and 40% use both bank and trade credit. The interesting aspect of this study is the impact that the usage of credit had on the growth rates for these companies. Companies that don’t use either bank or trade credit tend to be smaller companies with higher average profitability. Companies that use both trade and bank credit tended to be the largest companies but with lower average profitability. This makes sense because if a company does not take on debt then they also have no monthly debt payments and this will increase their average profitability. The downside of no debt is that the company does not have the cash to buy the plant, equipment or people necessary to grow their business. Companies that take on debt are able to buy these assets to grow their business. They however have to be run in a disciplined manner as they have to make a monthly payment to their financing institution. So these companies tend to have lower average profit than debt free companies. Even though debt free companies have a higher rate of profitability their absolute profit may bay be significantly less than companies with debt because of the scale that companies that take on debt can attain. Small Business Owners must think through where on this scale they want to be.