When it comes to scaling up, small and midsize companies have more options than ever. Whether they choose equity or debt, there's a whole spectrum of fundraising routes—from borrowing from friends and family, remortgaging, using credit cards, courting angel investors or crowdfunding. But for larger business loans, the lender of first resort is often still the big banks. With interest rates still low and competition from challengers intensifying, it's a good time to evaluate your options.
Why choose a loan?
Financing through debt instead of equity means you don't have to give up a stake in your business, sacrificing some of its future value. Repaying a loan can also boost your company's credit profile, making future borrowing cheaper. An advantage of a fixed-term loan with monthly repayments at a set rate is that it is straightforward to manage. However, if your cash flow is less predictable because, say, your business is seasonal or your clients often pay late, you may want a more flexible solution. A business lending specialist will help you tailor the terms of a loan according to the needs of your business, including things like payment holidays. Unlike an overdraft, a loan usually cannot be called on demand, so you'll have the full term to repay. On the downside, loans may take time to approve and there could be a lot of paperwork and hoop-jumping as you prove to a lender that your business is healthy.
Contrary to popular belief, borrowing money doesn't mean your business is struggling. In fact, it can be a smart way to transform and unlock the next phase of growth. Here are six ways that business loans could help you scale up.
Getting off the starting block.
Often, when entrepreneurs launch businesses, they will try to bootstrap, being frugal with their cash so they don't have to borrow from external sources. For those that can't raise the money alone, equity financing is a popular way to get a new business off the ground, but debt financing can also be used in the early stages if a company can show it will be able to repay.
Helping fund new equipment.
Investing in equipment that will improve productivity is a sensible reason to borrow. Business owners might use fixed-term loans for large purchases like machinery, vehicles or IT equipment. Hire purchase schemes and asset finance could also work well here; with asset-based lending, the thing you are borrowing to buy is used as collateral in the event you default on the loan.
Landing the right space.
Whatever stage your business is at, having the right premises, factories or facilities is one of the most important things to get right. You'll need to think about whether to buy or rent, and of course there are pros and cons with both. You could use a business loan for a relatively small amount of borrowing to put towards a property purchase, but in most cases it will probably be cheaper to take out a commercial mortgage. Bear in mind you might need a sizeable deposit. If you already own a building but you've outgrown it and want to buy something else, or you want a quick cash injection to complete a renovation, a bridging loan could give you the short-term finance you need.
For those that can't raise the money alone, equity financing is a popular way to get a new business off the ground, but debt financing can also be used in the early stages if a company can show it will be able to repay.
Managing cash flow.
You can also use loans to provide either long-term investment or shorter-term working capital. Working capital loans can help you bridge a funding gap on short notice, or respond to an unforeseen situation or emergency. They can be used to buy the raw materials you need to fulfill a big order, purchase inventory or to take on extra staff if you need them, but be sure any hires will bring in enough additional revenue to justify your borrowing. You shouldn't use loans for ongoing expenses in most cases, as this is a sign that your business is not managing money well and you could struggle with the repayment schedule. You could also use a loan to refinance or consolidate existing debt to a cheaper rate.
Tapping new markets.
If you're ready to push into new markets, you might want to launch a new product or service that can make this happen. Borrowing could help you fund the research-and-development spend, and the marketing budget you need to promote it.
For mature businesses ready to take a big next step, business loans or equity deals can be used to help you action mergers, acquisitions or takeovers. This is quite a complex area so you'll probably want the help of a competent deal advisor, and a detailed business plan to present to your lender.
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