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August 25th 2017

Grow your business... with debt finance

According to the British Business Bank Small Business Finance Markets Report for 2016/17, a declining number of smaller businesses reported an application for a new or renewed loan or overdraft. This has been matched by a build-up of cash reserves, with 21% of SME's reporting a credit balance of £10,000 or more in Q2 2016.

Perhaps it reflects our natural tendency to risk aversion. Perhaps it is because lending (at least through traditional channels) is perceived to have become more difficult since the Financial Crisis. Yet debt, managed in the right way, can be a powerful tool to assist meaningful business growth and the exploitation of market opportunities. And analysis consistently shows that 8 out of ten finance applications by SME's are successful.

From traditional bank loans and overdrafts to crowdfunding and peer to peer, the choices have probably never been so extensive. With interest rates at historic lows, could now be the time to reconsider how best to exploit debt to grow your business?

It's therefore worth noting some of the benefits of using debt to fund business growth, not just the downsides:

  • using debt, as opposed to equity funding, enables a business to raise funds without giving up control;
  • the costs of debt are usually known at the outset, whereas the cost of equity is harder to judge because issuing equity also involves giving up a share of future growth;
  • debt is cheap in historic terms due to low interest rates; what's more, the interest costs generally attract tax relief for the business, too;
  • debt can be an excellent tool to manage working capital efficiently, enabling businesses to 'ride out' seasonal fluctuations in trade or accommodate large one-off orders without having to hoard cash; and
  • committing to a repayment schedule can encourage good financial discipline.

There are, of course, drawbacks. Any business needs to carefully assess its ability to repay, before committing to borrow; attracting the best (ie lowest) interest rates will depend on the business's credit rating and on the amount of any existing borrowing; and in the event of default, lenders stand to get paid before the shareholders. Debt can be a more risky option than equity, especially for start-ups.

If you want to grow your business but have insufficient funds to take advantage of the opportunities you see, could debt funding, or some combination of debt and equity funding, provide the answer?

#growyourbusiness #debtfinance #scholesca

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