As the economy begins to recover from the effects of the Covid-19 pandemic, businesses all over the UK have set their sights on growth. Given the instability of the past 18 months, many may take a safety-first approach by focusing on reinvesting profits, but although this is a well-established way to grow your firm, it is usually limiting and will mean that your growth potential is bound by the amount of cash your company is generating today.
To ensure that businesses achieve their full potential for growth, owners and boards should aim to maximise the amount they can sensibly borrow. This allows an acceleration of growth by capitalising on expansion opportunities that exist right now, including the development of existing or new products, entry into new markets, foreign expansion or M&A. But what is the right amount to borrow?
The answer to this question is different for every business, and at BOOST&Co, we believe it is vital that lenders look at each loan as a bespoke opportunity. So you won’t find a loan calculator on our website, but we can provide some high-level tips to get you started.
Top tips on how much your business could borrow
- If your business has balance-sheet assets
If your company owns property, equipment or stock, or has a high-quality debtor book, it may be sensible to borrow against these balance-sheet assets first. Asset-backed lending is likely to be cheaper than cash-flow lending (borrowing against the profits or cash your firm generates, or revenue streams you may have secured). For advice, speak to our colleagues at Growth Lending, who are experts in this field.
- If your business is well established and profitable, growing less than 20% a year
You may be able to borrow against the cash your business generates. Use your current run-rate cash generation as a guide to how much debt your business can support, and ensure you allow for a reasonable buffer after debt servicing. A typical term loan will be repaid over a period of five years, so if your free cash flow is £1m a year, a loan of up to £4m may be suitable (allowing for interest and some residual cash flow after debt servicing). Be careful about using EBITDA or PBT as a metric for your business if it does not translate directly to cash.
- If your business is forecast to grow consistently in the next few years, by more than 20% a year
Look for a loan with an initial interest-only period to give you time to grow, and use your expected future cash generation as a guide to how much debt your business can support. Consider how much cash you will be generating when loan repayments start, but be conservative: discount your expected growth rates by 50% to ensure the debt is affordable. Lenders will look to ensure your business is already on a growth trajectory and has good visibility over the growth being forecast.
- If you want to borrow for M&A
Consider the expected cash generation of the business after the transaction is completed. Funders should be prepared to lend against the cash generation of the enlarged firm, especially if your team has successfully grown companies through M&A in the past.
- If your business is loss-making
Consider what a lender might use as collateral in the absence of physical assets or profitability. This could be long-term contracted revenue streams, a well-established base of repeat customers or a unique patent-protected product or brand. Specialist debt providers will lend against these types of collateral, especially if your company is growing quickly or is on a clear trajectory towards profitability.
The first two things you should do
Whatever the size of your firm, there are certain actions that every business owner should take before applying for a loan: look at your circumstances through a lender’s eyes and consider taking expert advice.
- Think like a lender – would you lend to you?
Put yourself in the position of someone who is considering lending money to your firm. What gives them confidence that you will be able to repay the debt: a track record of profitability, long-term customer contracts, a demonstrable growth profile?
If your business is struggling to make repayments, how might the lender get their money back: through collection of debtors, selling physical assets, scaling down operations or selling a part of the business? The last scenario is nobody’s preferred outcome, but a funder will consider it when deciding how much they can lend.
- Ask the experts what might work best for you
If you are unsure about borrowing, we recommend using a corporate finance or debt advisory provider to help you establish what type of collateral your business has to offer, how much you could borrow, how much you should borrow and which lenders are best suited to your firm.
Used in the right way – to support a convincing growth strategy in the hands of a strong management team – growth capital can be an effective way to expand. So don’t be afraid of debt: whatever the size of your firm, consider how a loan could help your business to grow.