There are many ways a business can access funding for growth – from friends and family, external investors and bank lending. It is common, however, for businesses to turn to their banks for everyday borrowing to ease cashflow, typically through the use of an overdraft.
Whilst many thousands of businesses will have accessed bank borrowing over the last three years via the CBILS and Bounce Back loan schemes, bank debt is often seen as something to be avoided. But there is both good and bad debt.
In November 2022, Andrew Griggs, Senior Partner at Kreston Reeves, joined a British Business Bank panel discussion alongside ASC Finance, Kent County Council and the Kent & Medway Business Growth Hub to explore how debt can help a business grow.
These were some of the things discussed at that panel discussion following the Government’s November Autumn Statement and continuing challenging trading landscape, many businesses are still in growth mode.
Yet even businesses with ambitious growth plans are likely to have exhausted cash reserves during the pandemic, leaving them with little option but to turn to external investment or debt financing.
External investment, whether angel or venture capital funding, will play a vital role in accelerating growth for many businesses. But it is not suitable for every business. Family-owned businesses where future generations are likely to take the helm may not, for example, welcome the dilution of ownership that venture capital funding brings.
And that is where debt financing, whether from a bank or other funder, might be a better option.
But first, let us explain what we mean by ‘good debt’.
Good debt is not bank funding that simply helps a business survive tough times. Whilst that might be essential to the short-term survival of a business, it will not contribute or facilitate growth. Good debt is borrowing used to invest in the future growth of a business. And contrary to what business owners may have heard, banks do want to lend to businesses with strong growth plans.
What lenders want
Lenders will expect businesses to be able to demonstrate, amongst other things, an understanding of their current borrowing and how that will impact the ability to repay future borrowing. They will also want a clear and compelling proposal from that business on how funding will be used to contribute towards growth.
Importantly, businesses need to plan ahead, and that will require forecasting when funding is most likely to be needed. For example, a business that is looking to acquire and fit out new premises may not need all of that funding immediately. It may be more appropriate to look first at what is needed to acquire the new premises and then perhaps explore other funding sources for plant, machinery and fit-out.
It is also important to remember that debt financing is a corporate transaction, meaning that it is there for the benefit of both parties. Put bluntly, debt finance must work for the lender just as much as it must work for the business, meaning that not all requests for borrowing will be granted.
Personal chemistry should also not be under-estimated. It may sound clichéd, but people do lend to people. We see that in the rise of the challenger banks who will often lend where traditional banks will not. Relationships, of course, are not built in a 30-minute meeting, so invest time in ensuring your lender understands your vision and plans for the future.
Banks will, in almost all circumstances, ask for personal guarantees from business owners. Whilst often uncomfortable, they are unavoidable. We would always recommend that businesses look to blended debt financing; looking to minimise the lending levels where a personal guarantee is required.
There are an increasing number of blended debt financing options open to business, with grants being one example.
By way of example, Kent County Council is currently offering an interest-free facility to fund capital investment and growth projects. Whilst these schemes often require match-funding or come with a demonstrable job creation requirement, they can offer a way to reduce bank funding. There will be similar projects and schemes operating across the country.
The next steps
The best advice is to be prepared and seek advice before you speak to any funders. Your accountant is well placed to help review current funding arrangements, forecast spending plans and support you in funding applications.
If your business is considering debt financing as a cost-effective way to fund growth and investment,
get in touch with Rachel Emmerson or Abbey Watkins:
Call: 0330 124 1399