Why you shouldn’t treat your business borrowing like personal debts

If you've been brought up to believe that personal debt is a last resort, be careful that the same attitude doesn't creep into your business finance planning

Why you shouldn’t treat your business borrowing like personal debts

If you’ve been brought up to believe that personal debt is a last resort, be careful that the same attitude doesn’t creep into your business finance planning

For many of us, our first lesson in handling money happened in the sweet shop, when we looked at the coppers in our hand, then gazed up at the jars of sweets, and realised that we cannot afford everything we want. If you haven’t got the money, you can’t have a flying saucer. 

As adults, we often have the same attitude towards money: if you can’t afford it, don’t buy it – unless it’s a house or emergency dental work from too many sherbert dib dabs. 

If you are a business founder, this attitude can seem noble, but it may also be what’s holding you back from achieving your full potential. Business debt is not like a personal debt.

It is my strong belief that founders should make a distinction between personal and business finances, not least because being too conservative about borrowing for your company can seriously harm your growth.

I asked some of my colleagues for their take on the issue. Rhys Cunnah, Head of Unsecured Debt at Swoop, says that many businesses prefer to “bootstrap” – that is, to only make purchases from cash that is already in the bank. This is especially true in the early days of a business: 

“Bootstrapping is fine for beginners, but it can be a habit that outlives its usefulness. Business borrowing should be thought of as both an investment and a big statement in your confidence in the business. Start up loans, which are available for businesses of up to three years old, usually come with mentorship and guidance so that you can have reassurance that you are using the funds wisely and growing the business.”

Although it costs money to borrow, Rhys says that having more spending power means you can achieve better economies of scale and offset the cost of borrowing:  

“We all know that buying in bulk means you get a better deal. If you bootstrap, you may only be purchasing stock or equipment as you need it. By having the money to cover a larger order, you may be able to negotiate better terms with the seller that puts a dent in the cost of borrowing.”

If the word “borrowing” makes you think of a traditional bank loan. Think again: the market is full of products that approach borrowing in ways that may prove more suitable for your business, such as a VAT loan, revolving credit facility or Merchant Cash Advance

Today, there are more ways than ever to boost your cashflow without resorting to a traditional bank loan. In fact, from my experience talking to our customers at Swoop,  going to your bank is usually not the best way to get finance, though they do push a lot of disappointed business owners towards us every time they turn down an application. 

Cashflow is an issue for every growing business, so just having the money in your account, or setting up an agreed facility you can draw on if you have to is a weight off the mind of the business owner, particularly when it comes to paying the wages bill. It can also be the difference of being able to take on a new order or having to say no.

What about property? Stuart Pawelczyk, Head of Commercial Mortgages at Swoop says that buying major assets such as a buy-to-let or  holiday let is an attractive long term investment for many business owners. He says:  

“It is an attractive proposition to borrow money that you can invest in an asset that will produce an income and appreciate in capital value. Buying your business premises rather than paying rent to a landlord also has advantages: you can sell the business but keep the property, which means it will generate rental income after you exit.”

And back to the cash flow issue, rolling all your debts into a mortgage will give you one one manageable monthly payment which can free you from juggling different financial products.

Various European and UK studies show that there is a direct correlation between taking on external finance and improving productivity. We also know that running out of cash is the primary reason for business failure. So look at debt, because even if you don’t need it now, there will come a time when you’ll be glad to know your options. And borrowing the right amount at the right time could not only save your business from failure, it could see you move up to the next level.

If you are a business owner, looking up at the jars of good things that your business needs and cannot afford, debt may be the best way to fill your pockets: borrowing can make a huge positive difference to a company when it is done for the right reasons.

Andrea Reynolds
Andrea Reynolds

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