Written by Carl Faulds, Managing Director of Cashsolv.
There are a number of reasons a company could need to borrow; however, the most common is to attain additional working capital. This extra cash will enable you to deal with a sudden cash flow crisis, seize a business opportunity or power growth, though of course you will need to budget for the repayments and interest. So how do you know when it’s the right time to borrow?
- You can no longer fund the business yourself
If this is your first business, there’s a good chance you launched it with your own savings or some form of personal credit. However, this type of finance can only take you so far, and if the company is growing fast then it’s time to look at a tailored business loan. These can vary significantly in their scope and scale: the capital could be anywhere from a few thousand pounds to many millions and the repayment term anything from 30 days to 30 years.
- You need to build a credit score for the company
A second problem with using personal finance to power your business is that your company doesn’t build a credit score in its own right. With the first business loan you take out, you demonstrate whether your company is a responsible lender, which will significantly shape its access to credit in the future. Even if you’re not in urgent need of money, taking out a modest business loan and repaying it quickly will stand your firm in good stead for the future – and there’s almost certainly something useful that you can do with the money.
- You’ve become a limited company
If you started out as a sole trader or partnership but have now incorporated, this is the time to separate your personal and corporate finances. Limited liability gives you significant protection from personal liability for your company’s debts – but not if you continue to borrow as an individual. Carry on relying on personal loans and credit cards to finance your business and you’re missing out on this protection, with potentially disastrous consequences if something goes wrong.
- You’ve hit a cash flow crisis
Even the most profitable and carefully run business can hit a cash flow crisis from time to time. In fact, growing companies are particularly at risk, as they will need to buy stock and take on people to service new customers before they are paid. It therefore makes good sense to have a cash reserve on hand even if you don’t need to use it imminently, and even though you will be paying interest on the sum borrowed. However, all is not lost if you don’t plan ahead and suddenly find yourself facing bills you cannot pay – you can use your bank overdraft, expensive though it will be, or take out an emergency loan from an online lender, who should be able to have the money inside your account within 24 hours.