When is the right time for a business to borrow? It’s a question we’re regularly asked, and it’s not always easy to answer. This is especially difficult now with so many changes happening in the world this year including the election in the US, the ongoing situation with Ukraine and Russia as well as our own new government.

Businesses have, until recently, been able to access relatively easy and affordable borrowing. However, since autumn 2022, the base interest rate has climbed, before reducing to 5% (August).

Whilst the drop in inflation has begun to filter through into interest rates, there is some way to go before the cost of borrowing returns to what many people would deem to be a ‘normal level’.  There is also the uncertainty of the impact of the October Budget. All of which leaves businesses asking whether they should borrow now or wait and see the impact of all these factors.

Borrowing for growth
Borrowing might at first be considered a high cost to the business, but considering borrowing through the lens of cost alone would be a mistake. Borrowing must be viewed through the lens of business opportunity. Businesses should always ask why they are borrowing and what will the cash injection be used for. 

The most compelling reason for borrowing now is to fund an opportunity for growth. Where a business has identified a strategic or tactical opportunity that might give it a competitive edge, borrowing might be the most sensible and practical way to unlock growth. Lenders are still willing to lend to businesses with a strong business plan that can demonstrate growth and opportunity. 

The cost of borrowing needs to be factored into those plans. And those plans will need to include the opportunity cost of acting now against delaying, in the hope of falling interest rates. Businesses should ask whether opportunity value outweighs the opportunity cost. 

Businesses need also to consider corporation tax. Interest on borrowing is tax deductible, reducing the amount of corporation tax paid.

Business credit score
It may surprise you to know that borrowing will help a business build a positive credit score, making it easier to access future borrowing should it be needed or if you need to expand trading facilities with your suppliers. Businesses with little or no credit score can find it tough to access affordable borrowing or to open new supplier accounts. 

Credit scores are determined by the financial results of the company and certain behavioural traits. Do they, for example, file their financial statements on time? Do they pay suppliers within agreed payment terms? They are a valuable indicator of creditworthiness and can help a business make informed decisions around the financial relationship they wish to have with a particular business.

Getting ready for borrowing
If you are looking for new funding, refinancing existing facilities or would like to review your credit score, you are likely to need the following things in place:

• Latest set of full accounts
• Six months bank statements
• Latest management accounts
• Cashflow forecasts/budgets
• Business case explaining the business purpose and plan

There are also other funding options that you might want to consider as there are several grants available for all types of business and in some instances match funding is available for training.

Conclusions
Businesses should focus on maintaining stability, and perhaps wait for the outcome of the budget on October 30th to find out if their business or personal wealth might be affected by further tax changes. But don’t let yourself be too cautious and miss out on that golden opportunity.

FUNDING OPTIONS

Bounce Back Loans

You may have taken out a Bounce Back Loan during Covid under the ‘pay as you grow’ scheme. You can now extend the loan term from six years to ten, at the same fixed interest rate of 2.5%. 

There is also the option to take one six-month repayment holiday or reduce payments for six months by paying interest only (available up to three times during the term of your loan). In theory you can access all three of these options and any of these options could be useful for managing your cashflow.

The Growth Guarantee Scheme
The Growth Guarantee Scheme is the successor to the Recovery Loan Scheme. Launched in July, it is designed to support access to finance for UK smaller businesses (up to £45m turnover) as they look to invest and grow. A wide range of products are available, and this could include term loans, overdrafts and asset-based lending.

Finance up to £2m can be accessed via this scheme, and the lender is provided with a 70% government-backed guarantee. Businesses can use the finance for any legitimate business purpose – including managing cashflow and investment.