A number of my entrepreneur friends have excellent relationships with their banks. Within a year of starting their businesses, their bank managers convinced them to avail of facilities like a line of credit to help them tide over working capital needs and to have access to funds for growth. As the businesses grew, so did the line of credit. Banks are only too happy to lend to people with a good record of servicing debt, i.e. paying interest on time.
The problem here is that with most of these folks, the credit line is almost always fully drawn. These folks are working for the bank. They would be wise to compute how long it would take to pay off the debt.
An entrepreneur needs to do two things well to run and grow a business. One is to protect strong gross margins and the other is to collect on time. This second is notoriously difficult. Even well-meaning clients have cash flow pressures and a lot of companies treat their vendors like a line of credit. It is the entrepreneur's job to ensure that he is not extending a free line of credit to his customers while he is paying his bank.
Interestingly, the one way to avoid falling into this trap is to work with customers who also have a strong gross margin and a good collection cycle. If they are making good money every month, there should be no reason for them to pay you late.
1 comment:
Very ideal sir,
But in times of this much of competition..
and every product becoming commodity, its really very difficult... not to give line of credit to the customers.. and pay on time to banks...
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