5 Good Reasons Why Companies Borrow

good reasons why companies borrow5 Good Reasons Why Companies Borrow

I once had a conversation with an accountant who will remain nameless, they said that they never advise their customers to borrow money as debt is never a good thing.

Interesting theory. There are certainly some situations where borrowing is definitely the wrong thing to do, but to have a blanket approach is simply short-changing the companies that trust you to advise them about their future.

Borrowing for your company can be a good thing, here are 5 good reasons for companies to borrow.

1 Start Up Capital

Every business, no matter what it is or what level it operates on will require start-up capital. This could be for something as simple as stock, inventory or a website, to something more complex such as Intellectual Property, staffing, R&D or premises.

Start-Up costs can be borrowed in the business name, borrowed personally or put in by the owner, family or friends. Either way, the company has taken on the responsibility of paying the borrowing back. You are however, trading and making money.

2 Reduce Personal Risk

The first port of call for many companies, especially SME’s is to look to the owner when funds are required. This commonly means the owner putting in their own savings or raising personal finance to inject into the company.

Leaving interest cost aside, it can be better for a company to borrow and leave the owner with cash resources. Carrying debt and having cash is always preferable to no borrowing and no cash.

The second part to this is that with some lenders advancing up to £250k without property security, it can be far lower personal risk to borrow through the company than seek personal debt. Worth considering next time the situation arises.

3 You Can Make More Than The Cost of Borrowing

Many times I get a company director look at the cost of finance and delay borrowing. Looking at the cost in isolation is always dangerous, you forget the bigger picture which is normally the positive reason why you wanted to borrow in the first place.

In much the same way as a retailer will buy stock and sell at a higher price, companies can often borrow and generate more profit than the interest cost, making borrowing a commercially good decision.

4 Cash Flow

There are good and bad reasons to borrow for cash flow. A few weeks back I worked with a client who had won a big order which was lucrative for them. They needed to finance a tranche of stock in advance. There was purchase contract in place, the buyer was high quality, the only downside was the 90 day payment terms.

This was straight cash flow funding for a specific purpose where the eventual income would be worth carrying some short term borrowing.

5 Personal Borrowing Capacity

Obtaining mortgage borrowing is not as easy as it used to be for self employed or company directors. Mortgage lenders will look at personal commitments and level of personal debt as part of their calculations.

If too much company debt is being taken personally, or the debts you have relate to your business then moving them into the company name can help. By having the right debts owned by the right entity you can free yourself up and make your capacity to borrow personally much higher.

It is worth looking at what borrowing you have that relates to your business, then looking at whether that borrowing should sit with you or your company. Also remember that interest on borrowing is a tax deductible expense paid before corporation tax.

By Dave Farmer

If you have any questions about this post then please add them above or contact Lime Consultancy direct. Lime Consultancy are a commercial finance specialist based in Sussex and working across the UK.

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