Why Do Growing Businesses Borrow Money

Entrepreneurs and small to medium-sized businesses (SMEs) keen to expand may believe that getting into debt is the last thing they want to do. 

However, there are positive reasons why a growing business might consider borrowing money from external sources like banks, building societies, or grant schemes. Other developing companies may turn to alternative means, such as crowdfunding and equity finance

Indeed, in the UK, a third of business loans went to SMEs. So, if this is something you’re considering, you’re certainly not alone. Leading research firm BDA BVRC found that in 2019, 46% of SMEs were turning to external finance, a rise of 10% on the previous year, to finance growth. 

In light of that, here are just a few reasons why growing businesses borrow money.

1. Meet Increased Demand

If your business is already up and running and you’ve had some initial success, that’s excellent news.

But, to expand, you may need extra investment to buy additional stock to satisfy demand and keep orders rolling in. 

2. Pay Start-Up Costs

Most businesses need some kind of financial investment to get up and running.

For instance, a loan to pay for a laptop, internet, stock, premises, etc. These types of loans may come from friends, family, savings, personal loans and/or credit cards.  

3. Reduce Personal Risk

Rather than using personal savings set aside for education, retirement or property investment, some business owners borrow money.

Rather than tie their hard-earned cash into their growing enterprise. After all, if personal money is invested in a business, it’s not available for its intended purpose.

4. Greater Investment

If used wisely, borrowed money can help growing businesses to generate more profits. These profits, in turn, will more than cover the cost of the original loan.

For instance, business owners keen to expand may spot a gap in the market or a growing consumer trend they want to capitalise upon. If that’s the case, borrowing money might be necessary to do exactly that. 

5. To Increase Cash Flow

All growing businesses face challenges. These include paying suppliers on time, which can put pressure on cash flow. It’s also important not to run out of stock so that you’re able to meet customer demand

Borrowing to increase your cash flow is one way to avoid those pitfalls. In fact, a boost in cash flow helps to keep the business moving, generating the necessary profits for expansion. 

6. Improve Your Credit Rating

If a business is snowballing without external financing, it may seem counterintuitive to start borrowing money.

However, if profits are good and growth is greater than expected, it may be a strategically sensible option to borrow. This helps to ensure you build a strong credit rating, so that you can access extra cash if your business growth slows down at a later stage. 

Before We Go

All in all, borrowing to boost your growing business can be a positive way of improving your financial stability and gain a competitive edge in the long-term.

So, if you haven’t already, this is a route to definitely consider. 

To learn more, get in touch with us today.

This blog was produced in collaboration with Vertical Vendors.