There is an old Banking saying that you should never ‘throw good money after bad’. Much in the same way that a gambler shouldn’t chase their losses, it’s a variation on the age-old adage that sometimes you need to know when to quit.
Many small businesses will be facing some tough decisions in the upcoming months. With inflation in double figures, soaring energy costs and a more general cost of living crisis unfolding, it seems that many businesses are likely to fail, especially in certain heavily affected industries such as hospitality and retail.
One of the survival methods businesses will (and should) consider is borrowing money to inject into their working capital to continue to fund their outgoings. While this can prove to be a lifeline for any struggling business, this method does need serious thought before proceeding.
Before considering borrowing any finance, a business owner should ALWAYS look at the following options first
Review and reduce current outgoings
- Ensure that all current direct debits and standing orders are relevant and there is no duplication
- Review all variable bills to make sure you are on the best and most appropriate deal/tariff. This especially applies regarding utility bills
Chase existing outstanding invoices
- Make sure that any clients owing funds to your business are fully paid up or a plan is in place for repayment.
- – Review current payment terms to assist cashflow. This may involve a full review of terms and conditions and some tricky conversations with customers but is essential for a business to survive.
Consider injecting personal funds
- Injecting personal funds into a business (usually via a Directors Loan) is more cost effective than traditional finance as no interest will be payable
- There also won’t be a repayment term which will reduce pressure on cashflow
- Clearly, if a business owner doesn’t have faith in their business surviving then this may not be such a sensible option
So, why should a business borrow money at present?
- When your business is still profitable. Despite the current pending recession, many businesses are still profitable and thriving in the current economic climate. Many businesses start and grow in recessionary conditions, and it can be wonderful opportunity to acquire other businesses as well as their clients. In these circumstances, borrowing money to make these acquisitions or take on new contracts is an excellent option.
- If after taking the steps detailed above, your business has bright prospects. While the current times may be tough, all businesses have their ups and downs. If a business owner feels that by taking on new contracts, staff and machines the business can turn to profitability in the next couple of years then the cost/benefit analysis may swing towards external investment.
- If its part of wider strategy. If you are planning to exit your business in the upcoming years and investment is required now to get to this point, then it’s likely to be worth the risk to borrow. As long as the short-term investment is cheaper than the longer-term return then this would be a sound strategy.
- If the business needs a new purchase and this purchase will benefit the business. When purchasing an asset such as a property, vehicle or piece of machinery, a loan facility is often required. As long as the purchase is of benefit to the business then it is likely that the outlay is worthwhile.
When should a business not borrow money at present?
- If the future is bleak. Sometimes a business is simply beyond help and, in reality, won’t be able to overcome its challenges. In this case, borrowing more money is only likely to speed up the inevitable demise. In fact, bearing in mind that additional borrowing will lead to increased pressure on the Directors post liquidation as they are likely to have personally guaranteed any business debt.
- If the business has historic losses which are likely to leave the business as a ‘zombie’. This is a situation where the business is insolvent to the extent where even multiple profitable years are unlikely to see progress made towards solvency.
- If the Directors have fallen out of love with the business. There may be a number of reasons why a business owner may have had enough of their previous passion. These include burnout from years of hard work, family pressure or simply being at their wits end. If this is the case, even if the business is looking to expand, it’s likely not a good idea to raise liabilities.
In times of uncertainty, it’s natural and understandable for a business owner be cautious and think twice before taking on any new financial liabilities. While this is often the best strategy, many businesses thrive during economic downturns, and it can be a great opportunity to grow while others are retreating to safety.
Thank you for reading – In a time of recession, should my business be looking to borrow money to survive?
