Every small business is different, and consequently has different borrowing requirements. Some may find that a credit card provides all the finance – and all the flexibility – they need, whilst others might benefit from a line of credit or invoice factoring or discounting. Others may prosper from a combination of all three.
In short, there are no hard and fast rules. However, there are clear benefits and drawbacks to taking out more than one form of finance at a time.
What makes multiple business loans a good idea?
The first factor is flexibility. It’s often very difficult to predict when you will need to borrow. Customers can come and go, opportunities for investment can suddenly arise – and, of course, an unexpected cash flow crisis can unexpectedly stop you in your tracks. If you have access to multiple sources of credit, you can react quickly instead of applying for a new loan and waiting days or even weeks for a decision. This can literally mean the difference between success or failure if you’re dealing with a sudden shortfall in cash.
Secondly, you will have more choice. If you have multiple sources of finance at your fingertips, you can use the most advantageous business loan at the most appropriate time. In fact, it’s just like having revolving credit, which you can use and repay whenever you require. What’s more, you can spread out your debt payments, creating a smoother cash flow, instead of having to ensure that you have enough money to meet a single, large repayment on a fixed date each month.
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What’s more, if you take out lots of finance – and more importantly, use it responsibly – you will improve your credit score. A good credit score means you can access further finance if and when you need it, and equally significantly means you will pay lower rates of interest.
Finally, you will have a safety net – if the business runs into trouble, you know you have several sources of cash on hand, and can even use one form of finance to pay back another.
What makes multiple business loans a bad idea?
From the foregoing, taking out multiple loans simultaneously sounds an excellent idea. However, like everything in life, it has its drawbacks – and some of them are pretty significant.
Firstly, you have to consider the cost. If you have three different forms of borrowing, that means three different monthly repayments and three interest charges. That means that if your cash flow goes belly up, you may struggle to keep on top of all those commitments and may soon be looking at liquidation.
Secondly, can you trust yourself? We’re not suggesting that if you have a line of credit you will suddenly turn into Imelda Marcos in a shoe store, but having borrowing available could affect your decisions on whether to invest in stock, people and premises. Business owners who struggle to say no to new financial commitments can soon find themselves in serious trouble.
You also need to consider your level of financial understanding. All forms of business credit are not equal, and some are significantly more complex than others. Make sure you read up on business finance and the advantages and drawbacks of the different options available. For instance, would an unsecured or secured business loan work better for you? (The former are safer from the borrower’s point of view, as the lender cannot simply seize an asset if payments are missed, though interest rates consequently tend to be higher.) Would you do better to establish an overdraft to deal with cash flow problems or could you benefit from invoice factoring and discounting? (Factoring involves borrowing the bulk of the value of your invoices as soon as you issue them, with the finance company dealing with your debtors and repaying the loan when they pay you. Invoice discounting involves the same process, except that you keep control of your debtor ledger.)
Finally, do you actually need access to all that money? If your business can operate equally comfortably with a single source of finance, it’s pretty pointless to make life more complicated than necessary.
By considering all the criteria above, you should be able to decide whether multiple sources of finance – and of course, which sources – are right to take your business forward.
Carl is a business recovery specialist. As Managing Director of Cashsolv, he offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business.