Growth is the lifeblood of every young business. Yet sometimes it seems too risky to take out finance to take your company to the next level. So what are the signs that you should seek to borrow?
Your customers are spending more
Growing your business doesn’t simply involve taking on new customers: you may find that your existing customer base is ramping up its spending. When this happens, you may need to borrow to finance the people, equipment and raw materials to meet their evolving needs.
Your market sector is expanding
When the whole market is growing, your business will almost certainly grow too. If your business sector is showing signs of going supernova, you need to have the finance on hand to exploit the opportunity.
You’re ready to diversify
Conversely, you may find that your marketplace is somewhat static, and the only way forward is to broaden your range of products or services. Chances are this will involve taking on new people or leasing new machinery, for which you’ll need finance unless you have the cash on hand.
You’re ready to make acquisitions
A more drastic way to achieve a step change in your turnover is to buy an entire business and merge it into your own. This will give you access to a whole new customer base and a new mix of talented people – but it won’t come cheaply.
What are the best forms of borrowing?
Having decided that it’s time to borrow for growth, you’ll need to decide how and where to obtain financing. An obvious solution is a bank loan, but banks have significantly tightened their lending criteria since the financial crash of 2008, meaning that you might struggle unless you have an excellent business credit score and a lengthy, profitable track record.
If the bank’s computer says no, bear in mind that alternative lenders apply quite different criteria and may be more interested in your prospects than your cash flow. Opt for asset-based lending and you can borrow against the value of your plant, premises or equipment – and because the loan is secured, the interest rate should be fairly competitive.
Alternatively, a merchant cash advance will allow you to borrow and then repay via a fixed proportion of your daily credit card sales. This means that your repayments can never overwhelm your cash flow during quiet seasons. But beware, this is generally an extremely expensive way to borrow.
Finally, invoice finance allows you to borrow against the value of your invoices as soon as you issue them, with repayment being made when your customers pay you. However, whilst taming a troublesome cash flow forever, this may not be a suitable way to borrow the large sums of money necessary to power business growth.
Ultimately, it’s very much horses for courses: the method of borrowing that’s right for you will depend on your individual circumstances, including the sum you need, the period over which you wish to repay, and your credit score and length of time in business.
Author: Carl Faulds is the managing director of Cashsolv, Carl offers advice and alternative finance support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business.