Credit and debt are often seen through a lens of fear and caution. However, this view does not take into account the many benefits that credit and debt can bring when managed in a responsible manner, especially for small and medium-sized enterprises (SMEs) like yours. This article aims to debunk the stigma surrounding credit and debt by highlighting their advantages and importance in modern financial management.

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What are credit and debt, and why is it important to debunk the stigma associated with them?

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Credit means borrowing capacity provided by lenders to an individual or business, which enables it to buy goods and services with a view to repayment of the amount borrowed in the future. On the other hand, debt is the amount of money borrowed by an individual or entity, usually accompanied by an obligation to repay the principal amount, together with interest, over time.

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In order to support financial literacy and empowerment, it is essential to eliminate the stigma associated with credit and debt. Businesses like yours can make informed financial decisions that will contribute positively to their financial well being by understanding the benefits and importance of credit and debt. In addition, it can help to dispel the stigma and dispel myths and misconceptions, thereby encouraging a more balanced and realistic view of credit and debt in society.

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To help you better understand, here are some common myths and facts about credit and debt

The advantages of credit and debt

The concept of borrowing can be intimidating for a lot of SMEs, but debt can be a powerful tool to fuel growth and secure better finances if it is managed properly. In this section, we'll look at the benefits of debt for SMEs and focus on how you can make it a strategic tool in order to achieve long term success.

1. Long-Term Investment

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The ability to finance large scale projects that would otherwise have been impossible for you is one of the primary benefits of debt for SMEs. Debt may give you the necessary financial resources to take your business to a new level, whether it's an expansion of operations, setting up additional locations or introducing a new product line. You can accelerate growth and increase your market presence by using debt to finance these strategic investments.

In addition, debt may be used to finance the investment in infrastructure or equipment, which can improve your company's performance, productivity, and competitiveness. In particular, it is possible to simplify the production process, reduce costs, and improve product quality by investing in new machinery, which will lead to improved revenues and profitability.

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2.  Maintaining Control 

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Fear of losing control over the business is a common concern for SMEs when it comes to taking on debt. Debt-based financing, especially those that are funded and supported by investors, on the other hand, may help you retain your ownership and decision making power. Your SME can still have investors to support your business without selling a part of it or giving decision-making authority to investors. Debt does not dilute ownership, unlike equity financing, for example, which involves selling part of your business to investors.

You can retain total control over your business operations and direction of strategy through funding instead of selling equity. This will allow you to make decisions autonomously and steer your company in a direction that matches your vision and objectives.

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3. Immediate Access to Funds

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A vital advantage of credit for your SME is that it allows you to access funds immediately, which will allow you to take full advantage of opportunities or address pressing financing needs. Debt can often be obtained immediately, allowing you to obtain the funds you need as soon as they are needed, unlike some traditional forms of business loans or business financing, which may take a long time to approve or provide collateral.

Imagine your SME has just delivered a bulk order to a business-to-business (B2B) client, with payment terms requiring payment in three months. Suddenly, you receive a new order from another client. However, since a significant portion of your working capital is tied up in the recently delivered order, you need financing to fulfill the new order. In this scenario, invoice financing can provide the funds needed to fulfill the new order while waiting for payment from the previous order, allowing you to capitalize on the new business opportunity and potentially secure a long-term client."

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4. Risk Mitigation

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A crucial benefit of debt to your SME is mitigating risk related to seasonal demand, as well as unforeseen business challenges like lengthy payment terms with your B2B clients in client payments. These situations may put strain on your cash flow, which will make it difficult for you to meet your financial obligations. In order to ensure that your business continues to operate and is able to survive in the face of uncertainties, debt financing may enable you to cover these gaps with sufficient funds.

Suppose you're running a tourism business that is experiencing an increase in demand in the summer months but has to deal with lower revenues during the rainy season. You may be faced with the difficulty of paying fixed costs such as rent, utilities, and payroll during the off season. By securing business financing or a short-term loan, you can access the funds needed to cover these expenses and keep your business afloat until the busy season returns.

In addition, lengthy payment terms with your B2B clients may have a negative effect on your cash flow and might lead to the late payment of your suppliers or workers. Debt financing can help you manage these situations by providing the liquidity necessary to cover your expenses until they are paid. This will make it possible to prevent cash flow shortages and assure the continuation of business activities.

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5. Building credit history for your SME 

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Using credit responsibly enables your small and medium sized enterprise to establish and build a solid business credit history, which is separate from personal credit. Your company's ability to manage credit and debt effectively is reflected in this business credit history. Your creditworthiness for future borrowing can be improved by a strong business credit profile, leading to better terms and interest rates.

A good credit history demonstrates to lenders that your business is a responsible borrower and thus increases its credibility and trust with creditors. The financing of future projects or investments can therefore be easier to secure.

To access funding on favorable terms, a good credit history is essential in order to demonstrate financial responsibility for the lender. Suppose that your manufacturing company regularly makes timely payments on its credit line, for example. You develop a solid credit record over time, demonstrating to lenders that you are dependable borrowers. Consequently, lenders are more likely to offer you favorable terms and interest rates if you need funding for future expansion or equipment purchases.

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Cultural and Social Perceptions Impacting Your SME

Various factors, such as myths about financial responsibility, fear of accumulating debt and negative experiences with debt management, contribute to the stigma attached to credit and indebtedness. Moreover, stigmatization is frequently accompanied by societal norms and cultural beliefs that label debt as a sign of irresponsibility or lack of responsibility.

Your SME can overcome negative stereotypes associated with credit and debt by promoting financial literacy and education, enabling you to take control of your financial future. Your ability to make informed financial decisions may be hampered by negative stereotypes, such as the idea that debt is always bad or that credit is risky.  You can change these stereotypes and make decisions in the best interest of your business by training both yourself and your employees on the benefits and risks associated with credit and debt.

Normalizing responsible credit and debt management practices can help reduce stigma and encourage healthy financial behaviors among SMEs. You can demonstrate that credit and debt are tools that can be used strategically to achieve financial targets by sharing the success stories of SMEs that have used credit and debt wisely to grow their businesses. This can contribute to changing the perception of credit and debt within the SME community, thereby creating a more positive attitude towards them.

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Do not be afraid to explore your debt financing options!

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By understanding the benefits of credit and debt, promoting financial literacy, and empowering yourself to make informed decisions, you can use debt as a strategic tool to grow your SME and achieve financial success. Remember, sound debt management is key and you should take the time to evaluate your needs, explore options that may be available or consult a professional when necessary. With the right approach, debt can be a valuable asset in your journey towards building a successful and sustainable business.

You may also explore debt financing options, particularly invoice financing and purchase order financing from Investree Philippines. These business financing or business loan options are suited to a variety of business needs if you only need financing to bridge the gap between your short-term demands.

Explore Investree’s crowdfunding platform to learn more about its collateral-free, reliable, and risk-based invoice financing based on a debt crowdfunding concept with low interest rates and flexible payment terms at registration.investree.ph. 

To learn more about business growth strategies, the benefits of crowdfunding platforms for SMEs, invoice financing, and purchase order financing, you may read more articles here.