We are raised to believe that debt is a bad thing, and to be avoided. And smaller firms have increasingly adopted this negative view in recent years. But the reality for many companies is that a degree of borrowing is both necessary and desirable, especially when they plan to grow. When the credit boom ground to a halt in 2008, and banks withdrew their lending facilities, many small and medium-sized businesses (SMEs) put their ambitions on hold, some contracted to survive, and others went under. Smaller business owners began to think differently about debt, some becoming shy of it, others even fearful of being in the red.
Fast forward to 2015, and one in two SMEs are ‘permanent non-borrowers’, according to the latest SME Finance Monitor by BDRC Continental. In other words, they have no borrowing at present, have not had for the past five years, and have no intention of tapping into external finance in the near future. And the smaller the business, the more likely they are to shun the idea of debt. Yet, four out of ten small and medium companies say they expect to grow. The question is, how do these firms intend to achieve this wished-for growth without an injection of investment?
Some plan to use existing company capital – almost all SMEs hold some credit balances, the BDRC data shows, and in the first half of 2015 four out of ten are sitting on sums of £5,000 or more. Others look to personal funds, though the proportion putting their own money into their operation has declined over time, largely because fewer firms feel the pressing need to prop up proceedings than was the case a few years ago.
Which leads us back to borrowing. A cautious attitude may seem like a good thing in a business owner, only borrowing when absolutely necessary, and cutting the company’s coat to suit its cloth. But the reluctance a stubborn proportion of the business population shows towards debt of any kind could be doing the firms concerned – and the economy – damage in the longer term. Underfinanced businesses are constrained, and all too quickly can become lame ducks. The alternative to borrowing – holding steady, limiting an enterprise’s ambitions, restricting growth – creates a different risk, that of being left behind by rivals who did invest for the future, and saw company debt as a temporary means to an ultimately profitable end.
Don’t just take my word for it. Government research earlier this year showed businesses that expressed low ambition when surveyed in 2012 were the most likely to have gone bust by now. About three in ten firms with low ambition in 2012 had grown in employment terms by 2015, compared with 38 per cent of SMEs with moderate ambition, and 41 per cent of those with substantive ambition. All of which is not to encourage irresponsible borrowing – or, indeed, lending. But, businesses that plan for growth typically require extra finance to put their plans into practice, and debt can be a quick, and practical way of finding that necessary boost.
Sensible, ambitious business owners who do recognise the useful function borrowing can play in their enterprises’ development will monitor their cashflow carefully. Regularly updated cashflow forecasts will soon indicate if a company could use finance, then entrepreneurs can act in plenty of time to keep operations running smoothly. I would argue that, as long as SMEs are managing their debt to income ratio, and have a strong handle on their cashflow, and business operations, borrowing need not be a source of anxiety, or fear.
I am heartened by one aspect of the BDRC research – small business owners are increasingly aware of alternative finance, the myriad of finance options available to them away from the banking institutions. More than a third of companies prepared to borrow have heard of crowdfunding – perhaps the most high profile example of alternative finance. One in three of those who have heard about crowdfunders would consider using them in future. Just one in five firms had heard of these alternative providers at the beginning of last year, so it would appear our industry is beginning to succeed in its mission to educate, and inform SMEs of their many funding choices.
After a prolonged period where ‘no’ was the word most often on bank managers’ lips, it comes as no wonder more companies are reluctant to consider borrowing. Entrepreneurs are sick of being disappointed in their efforts to gain access to funding. They are tired of being told they operate in too risky a sector, or are not a sufficiently viable or attractive option to merit capital. Too many, shrugging their shoulders, decide to keep battling on as they are, despite the lost opportunities for growth, expansion into new product lines or markets, and further employment that means.
But we see every day what extra capital can do to help small businesses become bigger, stronger, and more innovative. Debt may be out of fashion with some SME owners, but plenty of others realise a revolution is taking place in small business lending, which is giving small firms more options than ever before. Debt in itself is not a bad thing. With responsible management, the liabilities of borrowing are limited. And the benefits can be truly great.