When credit stops funding growth and starts funding cash flow

The number of companies in default in Brazil reached 9.2 million in July, a new record in Serasa Experian’s series, with R$238.6 billion in overdue debt. Micro and small companies account for 8.7 million of that total and carry, on average, close to seven delinquent accounts each. The average rate on non-earmarked business credit stood at 25.2% a year in May, one percentage point above a year earlier.

The detail that interests us most is what companies are borrowing for. Demand for credit grew 9.2% in the 12 months through June, even with rates at that level, and it was driven by working capital, not investment. The loan is paying suppliers, taxes and payroll. It is not funding new machinery, larger inventory or hiring.

There are signs of relief, and they deserve a mention. Sebrae’s Small Business Pulse survey shows that the share of small businesses with overdue debt fell from 28% in March to 25% in July, and that 46% of credit applications were approved, the highest rate in the series that began in 2022. But approval is not the same as cheap or suitable credit, and one in four small businesses still reports arrears.

We see in this a difference that the interest rate alone does not explain. A company that uses credit to cover cash flow is paying to keep the operation standing, not to grow. When every borrowed real fills the gap between the day payments are due and the day money comes in, the problem lies in the business’s financial cycle: collection terms, inventory turnover, margin. The bank only postpones the bill.

For us, credit is a tool, and it works when it funds something that returns more than its own cost. With the Selic rate at 13.75% and business credit above 25%, the math works for few uses: productive capacity backed by proven demand, technology that cuts costs, fast-turning inventory. Everything else calls for cash management before a visit to the bank. Three questions help tell one from the other: what are the average collection and payment terms, what effective rate does the company pay today, including fees and insurance, and will the money fund something that generates revenue or something that has already been spent.