Juan Pérez has had a grocery business for many years. He never needed a Financial Institution, since he received credit from suppliers and reinvested most of the profits from his business, after covering his personal needs.
His story began more than 15 years ago, when he was fired, after being declared surplus, after a process of restructuring the public sector.
He looked unsuccessfully for work in different private entities, without a favorable result, since the country was going through, at those moments, a difficult economic situation. One day, while passing the market, he met an old schoolmate, who had a fertilizer business; who encouraged him to start his own business adventure with the small capital he had received, as compensation, after being declared surplus. With some fear, but determined, he began, what would later become, his livelihood. He rented a small store, in a commercial area, bought the necessary bookshelf and bought some merchandise for cash. After some time, he began to receive supplier credit and, little by little, his business began to grow.
The cycle of his business was simple. I bought on 7 days credit and sold for cash. For their part, the merchandise rotated four times a month. In other words, if today they bought noodles from their suppliers, everything sold in a week; which meant buying again, then selling, and so on. That is, four times the same operation in a single month.
Regarding business sales, these amounted to S /.50,000 a month, with a gross margin of 15%, which meant a cost of sale of S /.42,500, which considering the turnover of merchandise (four times a month), implied having a minimum inventory of S /.10,625 (S /.42,500 / 4), financed by suppliers.
Everything was going very well, the business cycle was perfect: supplier credit matched the turnover of merchandise and there were no sales on credit; until one day a Credit Analyst approached Juan Pérez to offer him a working capital loan, without guarantees, for 12 months, for 50% of his monthly sales, that is, S /. 25,000, the equivalent of double of its minimum inventory (S /.10,625).
Juan Pérez, just in those days, had heard about the sale of a commercial premises, on occasion, at an offer price of $.15,000 ($.10,000 initial and the balance financed in five installments).
The result of the story is known. Juan accepted the loan, deposited the initial fee for the purchase of the premises and did not buy a new sol of merchandise, since it was not necessary, since he had supplier credit. As the payment term was very short (12 months): it defaulted, it had to refinance, it was negatively classified in the Risk Centers of the Financial System, it lost the supplier's credit and now it is about to fail.
The example, while extreme, is about highlighting how a bad credit decision can bankrupt a good business. In the present case, the Credit Analyst made a lousy evaluation: it did not take into account that the client did not need a loan for working capital, since the supplier credit financed all of its inventories and had no accounts receivable. He had to ask about other credit needs, such as financing fixed assets, which was the real need of the client; and grant the term according to the surplus of the economic - family unit. On the client's side, it should have indicated that it did not need financing for working capital, but rather for the acquisition of fixed assets, which would not have generated the problem raised.
Similar situations arise when the working capital of the business is not correctly determined, due to the fact that not all commercial accounts receivable or debts with banks are considered, commercial accounts receivable are not verified correctly or inventories are over-estimated. Facts that involve a miscalculation of the true working capital of the business and, in addition, the granting of a greater volume of loan, which is later diverted to other commercial activities or personal expenses of the client.
Another common mistake is to finance the entire working capital of the business, with which the client does not assume any risk and everything happens to be financed by third parties. The correct thing would be to finance a ceiling (80%) and consider a maximum indebtedness, with respect to equity (0.80).
To conclude, it is worth remembering that the Credit Analysts are the business advisers of the microentrepreneurs.
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