Most businesses operate in a competitive environment and are expected to make decisions based on the situation. Sales on a cash basis are beneficial since they help maintain a high flow of money. It offers a cost-effective method of making transactions that is particularly advantageous to small businesses. Accepting cash only can lower the cost of transactions while enabling businesses to retain more money. It lowers the risk of getting bad debt since it helps avoid interest expenses. However, credit transactions involve accepting credit cards, allowing customers to pay later upon receiving or consuming goods or services, and business loans (Wang & Wang, 2019). Using credit plays a role in improving sales as well as boosting profits. Credits cards improve the purchasing power while promoting the relationship with customers. This paper explains factors influencing businesses to hold cash and the benefits of using more credit for business operations.
Businesses consider holding cash for various reasons, including transactions, speculative, precautionary, compensating balances, and future requirements. In the transaction motive, businesses require cash to meet their daily transactions by making the necessary payments (Wang & Wang, 2019). Liquid asset balances are important because inflows and outflows are not usually perfectly synchronized. This ensures the working capital inflows exceed the outflows to facilitate a smooth flow of operations. The precautionary motive suggests that businesses need to hold cash to enhance their ability to handle emergencies, uncertainties, and cash-balance fluctuations and avoid running out of cash. Uncertainties can arise due to disruptions or prolongation of the operating cycle. Additional cash is necessary since it acts as a precautionary motive.
Speculative motives of holding cash enable businesses to explore unexpected investment opportunities while benefiting from prompt payment discounts. This plays a role in the improvement of credit ratings, productivity, and subsequent profitability. Surplus cash in certain money market instruments and marketable investments is necessary for enhancing returns and facilitating improved productivity (Wang & Wang, 2019). It enables businesses to maintain company liquidity and support the purchasing of readily marketable securities. Another reason influencing companies to hold cash is future requirements such as the purchase of fixed assets, dividends and tax, buy-back of shares, and loan repayment. Moreover, cash supports the compensation of bankers for the provided services.
It is better to consider using more credit than cash when making business decisions. This is because it promotes a credit score with many benefits, including enhancing qualifications for a loan. An excellent business credit score increases the chances of acquiring a loan from financial institutions. Poor credit scores hinder lenders from giving out loans to businesses since they fear that they would not be in a position to pay on time. However, a high credit score shows that the involved business is likely to pay painlessly and quickly (Wang & Wang, 2019). Moreover, using credit influences better loan terms by boosting creditworthiness. It enhances the ability of businesses to negotiate larger credit limits and lowered interest rates.
Business credit promotes the protection of personal finances by enabling the separation of business financial obligations. This helps save personal credit and ensures that business issues are handled properly. Some of the lenders would be interested in the evaluation of both business and personal credit scores. It is also necessary to note that high business credit influences success when applying for financing. This means that purchasing on credit is beneficial when intending to acquire additional inventory and equipment. It influences suppliers to trust a business and develop a positive attitude towards its ability to pay debts. They believe that the business is financially stable and becomes more comfortable when planning for deliveries.
Deciding to use credit improves the accessibility of funds for expansion. A loan can enable businesses to achieve better outcomes and expansion within a short period. For instance, it can provide funds for purchasing new equipment, inventory, or facilities that improve productivity. Monitoring business finances facilitates the maintenance and improvement of credit scores (Maksum, Muda, & Azhar, 2021). Paying bills on time influences an appraisal from the credit bureaus and improvement of business credit score.
Having a business credit card comes with many benefits, including enhancing protection, convenience, categorization of expenses, and reduced cash-flow problems. It is convenient and easy to carry a business credit than huge amounts of cash in the pocket. A rising cashless economy trend implies that using credit cards is the sole method for making certain payments (Wang & Wang, 2019). They offer better protection of money since it is easier to dispute and claim a refund for incorrect charges. Unlike when using cash, credit cards provide purchase protection if goods are stolen, lost, or not delivered.
Business credit cards facilitate important purchases, including when there is a shortage of funds. Businesses benefit because they are not affected by short terms issues that affect the flow of money. This explains that businesses are more secure and positioned to achieve their objectives when using credit than cash. It enables businesses to run more smoothly by boosting confidence and trust with their stakeholders.
Maksum, A., Muda, I., & Azhar, I. (2021). Opportunities for implementation of non-cash transactions of supply chain management of village-owned business agencies. Uncertain Supply Chain Management, 9(1), 69-78. Web.
Wang, Z., & Wang, Y. (2019). Ownership, internal capital markets, and cash holdings. Emerging Markets Finance and Trade, 55(7), 1656-1668. Web.