With the right type of borrowing you could pursue and invest in business opportunities that would otherwise pass you by. Here's how.
Whether your business is at its early stages or further down the line, you may need an injection of cash to help it grow.
If your business doesn't have the money readily available, you don’t want to put your personal savings at risk or you need to borrow a substantial amount, borrowing can be an affordable option.
You can use business finance for almost any reason, but some of the most common are to:
Hire more staff
Buy new equipment
Move to larger or new premises
Buy raw materials
Buy more stock
Invest in marketing and sales
Help with cash flow
Pay for an unexpected cost
Pay for other business services
The investment should be one that is likely to make you more money than the cost of the borrowing. The bigger the difference between these two figures the more worthwhile it will be.
Some of the benefits of borrowing will be harder to quantify than others. For example, making sure you have the latest equipment, boosting your credit rating by showing you can reliably pay off debt and having more flexibility in how and when you can spend money.
Although borrowing can help to increase the value of your business overall, it costs money and could put unnecessary pressure on your business. This is why it’s important to think carefully about what you need the money for and how much you need to borrow.
If you borrow too little you could find yourself needing more within a short space of time and being unable to invest in what you need to. If you borrow too much you’ll be paying unnecessary interest costs or might struggle to make the repayments.
Deciding when is the right time to borrow funds is dependent on your business needs and financial security.
You might feel like you’re at a stage when you want to do things to boost your business that wouldn’t be possible without extra funds but is your business strong enough to cope if things don’t work out as planned?
Consider the true value of the investment you want to make and look at the best and worst possible growth scenarios in the short, medium and long term so you can plan for the impact of both.
Growing your business involves risk but you need to be reasonably confident that it will be worth it. You could also benefit from getting some independent advice.
When you come up with a plan for how you’re going to spend the money, you need to make sure it’s achievable and that you’ll be able to stick to it. If you end up using the money in other ways you won’t be able to properly put your plan into action.
Many companies borrow to take on more staff or move to bigger premises to increase productivity, or expand their operation into new business areas.
Staff can be one of the biggest costs of a business so work out the financial benefit of hiring new staff and whether this will offset the cost of both your borrowing and paying their salaries before you decide to do it. The same goes for borrowing to move to bigger premises.
You should also consider the competition you’re up against in your sector and what you need to do to achieve growth at the stage your business is at – this might be different to when it was in its earlier stages.
Don’t forget to factor in sales and marketing costs if that isn’t the key purpose of the investment.
If you have a specific business opportunity with the potential for an immediate profit, borrowing money to secure it could be worthwhile.
Work out how much you need to borrow and the cost, then weigh this against the potential profit your business could make. You need to be realistic about how long it will take to get the growth you’re aiming for to decide whether the investment is worth going ahead with.
If you think that borrowing is right for your business, compare your options to find the cheapest deal.
It’s also worth checking which type of business finance will best suit your needs, for example asset finance if you are buying new machinery or business equipment.
The different options fall into two categories – debt finance, where you borrow money and repay it with interest, and equity finance, where you sell a share of your business to give the investor a return on their money.
Here are some of the main ways you can borrow for your business. Each one has its pros and cons.
|Business loan||Debt finance||You borrow money from a lender and pay it back over one month to 25 years. Loans can either be secured, where you provide an asset the lender can sell in case you can’t pay back the loan, or unsecured. There are different types of loan, including by borrowing against or selling your unpaid invoices.||You can borrow a cash lump sum with predictable repayments. It lets you keep ownership of your business.|
|Business credit card||Debt finance||A credit card you use to make purchases for your business up to your credit limit in the same way as you use a personal credit card.||They can be useful for day-to-day spending and can be issued to multiple members of staff. You only borrow money as and when you need it and won’t pay interest if you pay it off in full each month. You can also get cards that give you 0% interest on purchases for an introductory period.|
|Business overdraft||Debt finance||A flexible borrowing facility as part of your business bank account that works in the same way as a personal overdraft. You are only charged interest on your overdraft balance, although you may have to pay a fee. Interest is usually calculated daily.||It’s quick and easy to arrange. If you don’t end up using the overdraft it won’t cost you anything in interest.|
|Crowdfunding||Debt or equity finance||You pitch your business online to attract a ‘crowd’ of people to invest in your business in return for rewards, such as a discount on your product.||You may be able to keep the money and don’t have to give up ownership of any of your business, depending on the type crowdfunding you choose.|
|Angel investment||Equity finance||You get funding from a wealthy individual or more than one in return for a share of your business.||You don’t have to pay the money back and your business can benefit from the investors’ experience, skills and contacts.|