Should you borrow to grow your business? Swoop’s five-point checklist will help you decide

Everyone will tell you to borrow for your business, but is it the right strategy?

There are thousands of financial products on the market – from credit cards to commercial mortgages – and businesses make their money when you borrow. 

But should you be borrowing in the first place?

Unlike personal borrowing, business borrowing should be considered an investment that will have a positive return. For example, a new vehicle may be cheaper to run, project a more professional image or expand your existing fleet, meaning you can serve more customers. 

Swoop’s five-point checklist is designed to help you decide whether borrowing is right for your business.

Question 1: Is there a specific, clearly defined business need for the borrowed funds?

• No: Reevaluate the need. Borrowing for unclear or non-essential purposes is generally unwise as you will be making repayments long after the funds have been used.
• Yes: Proceed to Question 2.

Question 2: Can this need be met with existing funds (savings, retained earnings, etc.)?

• Yes: Consider using existing funds to avoid incurring debt – though make contingencies for unexpected expenses and ensure you maintain a buffer to protect you against dips in income. 
• No: Proceed to Question 3.

Question 3: Does the potential return on investment (ROI) from the borrowed funds outweigh the cost of borrowing (interest rates, fees)?

• No: Reassess the investment opportunity or seek alternative funding sources, such as grant funding.
• Yes: Proceed to Question 4.

Question 4: Is the business financially stable and capable of handling the additional debt burden?

• No: Consider strengthening the business’s financial position before borrowing. Getting the timing right can make a big difference to your outcome.
• Yes: Proceed to Question 5.

Question 5: Has a thorough financial plan been created to manage the loan repayment and its impact on the business?

• No: Develop a detailed financial plan to ensure responsible borrowing.
• Yes: Proceed to the decision.

Decision:

• If the answers to all previous questions are “Yes,” borrowing money may be a viable strategy to grow the business.
• If any answer is “No,” reconsider the need for borrowing or explore alternative funding options.

If you’ve got to “yes”:

If borrowing is right for you, make sure you evaluate the risks associated with the proposed investment and the potential impact on the business’s overall financial health.

Remember that being turned down for a loan can impact your credit score, which will make borrowing more difficult and expensive in future. Building an application with help from a  financial advisor or accountant will give you a greater chance of a positive result. 

You should also consider diversifying your funding sources as this will reduce your reliance on debt. Above all, weigh the pros and cons carefully and make an informed choice that aligns with your business goals.

Swoop can help: our aim is to help our customers grow their business in the right way, at the right time. We help SMEs access funding of all kinds, make it easy to compare rates and save money on must-have products including energy and insurance. Make sure you’re signed up here: [SWOOP LINK] 

Three borrowing products that might be right for your business

Borrowing doesn’t just mean a loan from the bank. Here are three innovative borrowing products that may suit your needs better: 

Start-up Loans

These are the best-value loans on the market for businesses in their early stages. You could borrow up to £25,000 per director and receive mentoring to help you use it wisely.
Find out more about start-up loans here.

Merchant Cash Advance (MCA)

If you use a credit card terminal and unpredictable income, this could be ideal for you. Funds and borrowed at a set fee and you pay back the capital as a fixed percentage of each sale.
Find out more about merchant cash advances here. 

VAT Finance

If your business has a quarterly VAT bill, you can smooth your cashflow with VAT Finance. Holding onto more of the money you’ve earned for longer can give your business advantages.
Find out more about VAT finance here.

To explore all of the options available to your business, create a free account today.