It’s common for a business to be in some form of debt and borrowing money to make money isn’t a new idea. Here are four reasons why borrowing money for business is not just a fact of business life but a smart choice.
1. Costs need to be paid
Every business needs some form of investment before it can begin trading. This could be something as simple as a computer or a telephone, but most need more. There are premises to trade from, stock to sell, marketing to promote the business and, of course, wages to pay the staff – even for just a sole trader.
The money for this could come from many sources. Some business owners take out a personal loan or use credit cards as a form of flexible finance. The money may even be borrowed from friend or family.
2. Working capital is needed
Suppliers need to be paid, often before customers settle their debts. This puts continual pressure on the company’s cashflow. To keep this cycle moving, and to avoid running out of money, a certain amount of cash must be made available to the business at all times — working capital.
Over time, the business can finance working capital out of profits, however this comes after a period of successful trading. If the business is growing quite fast, the capital required could always be ahead of the surplus generated from trade, meaning continual borrowing is needed.
3. Use the investment to make more than it costs to borrow
This is one reason why many firms of all sizes continue to use credit, even when they’ve been trading for years. Using these funds to generate profits can more than cover the cost of borrowing!
Taking out credit, whether it’s a business loan, invoice finance or an overdraft, allows investment in more sales, creating more profit. Successful businesses spot opportunities in the market and borrow the funds they need to seize the moment.
Asking how much it costs to borrow money is often the wrong question. Ask instead: “What’s the difference between how much you can make and how much it costs to borrow?”
4. Borrowing reduces personal risk
It may seem odd for your business to borrow money when you’ve already got personal savings that you could dip into. But clearly you saved that money pot for a reason — perhaps to fund children through university or to plan for your future retirement.
Whatever the reason, if you tie up that cash in your business, it won’t be available for the original purpose, or for any personal emergencies that crop up. Taking out credit for your business offers a number of benefits and can really improve your chances of commercial success.
Our experienced EFM Experts can help to prepare and support you across your funding needs.