Cash Is Not Always King

Cash Is Not Always King

March 19, 2015
Sometimes it’s better to have business credit.

Pretty much everyone as heard that cash is king. Usually having cash means that your payment method is virtually guaranteed. This is still the case even though we are in an ever increasingly cashless society.  I also wonder why we don’t say Credit is King.  We need it for almost every aspect of life, from getting loans, homes, jobs, turning on utilities, insurance, and getting apartments–you name it. Credit is just as important for business too.

When cash is not enough.

We had this printing company that needed new equipment. They were making $3 Million per year and had great cash flow. Mind you, less than 2% of businesses enjoys these kind of revenues. From the beginning, the printing company purchased supplies and paid vendors religiously in cash.  Management never gave it a second thought about building business credit because they enjoyed good cash flow.

You’re probably wondering what’s the problem? Admittedly, it’s a great problem to have. Normally, we’d be right.  However, it wasn’t until the printing company wanted to buy some high end industrial printing equipment on credit, that they realized cash wasn’t enough.

The Application Decline

The amount of the equipment they needed was well over $175,000.  At this time, management thought it best to conserve as much cash as possible as they were looking to expand and do more marketing. Because they had excellent revenues, they figured they were pretty much guaranteed an approval, but they were absolutely shocked when they were declined. Imagine the looks on their faces.

The reason for this decline was simply because the company had not built adequate business credit to justify their funding request.  It did matter that they had great income, because their business credit track record was sorely lacking.

Look at it this way. In the eyes of the lender, they did not know if the printing company would make even the first or second or payment for the equipment. Chances are they would, but lenders are all about minimizing risk.  Furthermore, the printing company had never financed anything close to $175,000. Maybe a few small $100 Net 30 accounts, but that was about it.

I know it’s sounds kind of silly to get turned down when you’re making $3 Million per year, but this is how business credit works. Just as payment history is a huge part of determining how good of a risk you are with personal credit, it is just as important with business credit.

So the printing company had to step back and rethink how they were going to best acquire this equipment. The whole moral to the story is that no matter how great your cash flow is, building business credit should not be overlooked in the slightest because you never know when you might need it most.