Why business debt should NOT be treated like personal finances

Many of us were brought up with the idea that if you can’t afford to buy something, you should save up until you can. For business founders, particularly those starting at the kitchen table, it feels right to carry these ideas about money through from personal life to business. But should you?

Andrea Reynolds, Founder and CEO at Swoop, says that money can often come with emotional strings: 

“Many people set up their businesses because they want to be their own boss, or they’ve struggled financially and having their own business will give them freedom. And when people talk about freedom in financial terms, they often mean freedom from debt. But founders should make a distinction between personal and business finances, not least because being too conservative about borrowing for your company can seriously harm your growth.”

Rhys Cunnah, Head of Unsecured Debt at Swoop, says that many businesses, particularly in their early days, prefer to “bootstrap” – that is, to only make purchases from cash that is already in the bank: 

“Bootstrapping is fine for beginners, but it can be a habit that outlives its usefulness. Business borrowing should be thought of as both an investment and a big statement in your confidence in the business. Startup loans, which are available for businesses of up to three years old, usually come with mentorship and guidance so that you can have reassurance that you are using the funds wisely and growing the business.”

Done right, Rhys says the costs of borrowing can be offset: 

“We all know that buying in bulk means you get a better deal. If you bootstrap, you may only be purchasing stock or equipment as you need it. By having the money to cover a larger order, you may be able to negotiate better terms with the seller that puts a dent in the cost of borrowing.”

Rhys also points out that borrowing no longer means a traditional bank loan: a proliferation of specialised products now means that a niche lender may have a form of borrowing that suits your company – such as a VAT loan, revolving credit facility or Merchant Cash Advance:

“There are more ways to boost your cashflow without having a standard, pay-back-monthly loan from your bank. In fact, going to your bank is usually not the best way to get finance.”

Andrea agrees: 

“Cashflow is an issue for every growing business, so just having the money in your account, or setting up an agreed facility you can draw on if you have to is a weight off the mind of the business owner, particularly when it comes to paying the wages bill. It can also be the difference of being able to take on a new order or having to say no.”

The biggest investments of all are in property. Stuart Pawelczyk, Head of Commercial Mortgages at Swoop says that buy-to-let or purchasing holiday lets are popular because people can see a clear return on the investment: 

“It is an attractive proposition to borrow money that you can invest in an asset that will produce an income and appreciate in capital value. Buying your business premises rather than paying rent to a landlord also has advantages: you can sell the business but keep the property, which means it will generate rental income after you exit.”

Stuart adds that if a business has a number of different debt products, debt consolidation is worth considering: 

“It comes back to cash flow. If you have a number of debts and repayments feel expensive, rolling them together into one manageable monthly payment is a good solution to the problem. It improves cash flow and makes visibility over your outgoings much easier.”

For Andrea Reynolds, every business should think about borrowing: it can make a huge positive difference to a company when it is done for the right reasons: 

“Various European and UK studies show that there is a direct correlation between taking on external finance and improving productivity. We also know that running out of cash is the primary reason for business failure. So look at debt, because even if you don’t need it now, there will come a time when you’ll be glad to know your options. And borrowing the right amount at the right time could not only save your business from failure, it could see you move up to the next level.”