The cost of loans may have increased, but smart business owners can still make borrowing work
If you’ve ever played poker, you’ll know that sometimes it isn’t the hand you’re dealt that makes you a winner – it’s how you play it.
With new tax rules in place, business owners may feel they have been dealt a bad hand, but depending on what you do with your cards, it can still be a winner. The temptation in tough times is to cut your losses and play it safe. A better strategy is to be bold and create your own future.
I realise this is easier said than done, but any change means that new circumstances have presented themselves that can be turned to your advantage. I actually believe that this is a golden time for investing in your business; not because it’s particularly easy but because the risks of doing nothing – leading to stagnation, vanishing margins and failure – actually outweigh those of being optimistic and fuelling growth.
Unless you want to give away part of your business to an investor, there is really only one way that you can grow: invest in yourself.
Internal investment, in which the business owner raises funds to purchase new machinery, boost marketing and all the other things that businesses do grow, has traditionally been achieved through borrowing. The cost of borrowing is met by the increased profits of the now bigger business. Yes, it costs money to borrow money, but if your growth strategy works, it is worth it.
Last year, we saw rates rise for the first time in a historically long period of low interest rates, increasing the cost of borrowing. This has understandably put many business owners off borrowing and become cautious about finance – playing it safe, in other words. This means that those who take a bolder approach to growth have an opportunity to win market share and exploit opportunities that others are afraid to take.
This is not to say we should all be gung-ho about rushing to the bank and asking for six figures to throw at the marketing team. I would recommend that you have a clear idea of what it takes to grow your existing business and cost it properly. Even then, don’t rush to the bank: find savings in other areas of your business (at Swoop, we check FX costs as a matter of course because the average savings we’ve found are in the region of £7,000 per year) and explore what grants are available in your sector or location.
After that, you’ll be rushing to the bank, right? Not yet! Check your borrowing options. For example, at Swoop we’ve been advocating for VAT loans, not because our customers can’t afford to pay their bills, but to help with cash flow.
We think of it like this: you need the money for a project, and it’s sitting in your bank account. But you have to pay it to HMRC, so you can’t use it – which means borrowing back the money you’ve just paid out…
Doesn’t make sense, does it? A VAT loan lets you hold on to the capital for longer, is short term, low cost, and can be used to grow your business in a way that covers the cost of borrowing in the first place. Good cash flow is the bedrock of a successful business, and lately this has been my go-to example of why it matters.
How does this work in the real world? For example, if you’ve been stung by a hefty energy bill, you might wish to invest in solar panels for long term sustainability. Let’s say these cost £20,000. Business A might go straight to the bank and get a loan for £20k, and consider themselves lucky if they get it.
Business B might think Business A isn’t so much lucky as reckless. They find £7,000 in FX savings. Then they find a grant for £5,000. Now they only have to find £8,000 – which is already in their bank account but earmarked for paying VAT.
In three months’ time, Business A could be looking at hefty bills for their borrowing, while Business B is enjoying the sunshine and paying the last installment of their loan.
Digital banking has thrown up dozens of niche products and lenders; understanding them can be a full time job, but utilising them wisely to get the right funding in place can make a big difference to your viability as a business. You’ll also find that your bank may not be the best place to start your borrowing journey.
Knowing how to play the game doesn’t mean keeping an ace up your sleeve, it’s just that understanding all the rules will put you at a (perfectly fair) advantage.