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 that the right strategy?

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

But should you borrow?

Unlike personal loans, business loans should be considered an investment that will have a positive return. For example, new vehicles 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 if a loan is right for your business.

Question 1: Is there a clear, specific business need for the loan funds?

• NO: Reevaluate needs. Borrowing for unclear or unimportant purposes is generally unwise because you will be making payments long after the funds have been used.
• Yes: Continue to Question 2.

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

• Yes: Consider using existing funds to avoid incurring debt – while making allowances for unexpected expenses and ensuring you maintain a buffer to protect you from a drop in income.
• NO: Continue to Question 3.

Question 3: Is the potential return on investment (ROI) of borrowed funds greater than the cost of borrowing (interest rates, fees)?

• NO: Reassess investment opportunities or seek alternative funding sources, such as grants.
• Yes: Continue to Question 4.

Question 4: Is the business financially stable and able to handle the additional debt load?

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

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

• NO: Develop a detailed financial plan to ensure responsible lending.
• Yes: Proceed to the decision.

Decision:

• If the answer to all of the previous questions is “yes,” borrowing money may be a viable strategy for growing a business.
• If the answer is “no,” reconsider the need to borrow or explore alternative funding options.

If you must “yes”:

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

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

You should also consider diversifying your funding sources as this will reduce your dependence 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 goal is to help our customers grow their businesses the right way, at the right time. We help SMEs access all types of funding, making it easy to compare rates and save money on must-have products including energy and insurance. Make sure you register here: [SWOOP LINK] 

Three loan products that might be right for your business

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

Initial loan

This is the best value loan on the market for businesses in their early stages. You can borrow up to £25,000 per director and receive mentoring to help you use it wisely.
Find out more about startup loans here.

Trader Cash Advancement (MCA)

If you use a credit card terminal and have unpredictable income, this could be ideal for you. Funds and are 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 quarterly VAT bills, you can smooth cash flow with VAT finance. Holding more of the money you earn longer can benefit your business.
Find out more about VAT finance here.

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

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