Managing Debt when Funding Business Growth or Expansion

For many businesses, carrying debt is a necessary part of good business practice. It’s a key driver in the capital mix.

Debt can be used to fund growth and purchase assets, but it can also be crippling, especially in an economic downturn.

What is right for one business may not be right for you, so how can you be sure that the debt you’re carrying is healthy debt?

Working out whether you’re carrying too much debt is really dependent on a variety of factors. Every business is unique and its approach to cash flow and investments is unique.

An easy way to consider whether you’re carrying too much debt is when your repayment options are straining your cash flow. You’re unable to grow because all your hard-earned money is paying off debt and you’re unable to invest in growing your business. A common benchmark is the debt-to-equity ratio. For instance, a ratio above 2:1 could indicate you’re excessively leveraged.

Other factors come into play like the rising cost of doing business, increasing interest rates, spiraling energy bills, changes to taxation and salary expectations. Increasingly sectors like manufacturing and hospitality are coming under more pressure.

What alternatives are there to borrowing for business growth or expansion?

Non-bank lenders are able to offer businesses a range of flexible and accessible financing options which traditional banks may not offer. Options which mean you don’t have to take on more debt. Options which mean you can leverage assets like unpaid invoices, or inventory to access funding.

Often these financing options are more adaptable than traditional loans, giving you increased liquidity to manage day to day cash flow or help with growth strategies like management buyouts and acquisitions, without resorting to long-term debt.

Often non-bank lenders often provide a more personable service, because they work with businesses like yours every day and they want to keep working with you over the long term. They understand the challenges businesses face in today’s market conditions. And are able to carefully assess your business needs with you.

Bibby Financial Services research indicates that many businesses are relying on unsustainable forms of finance for their business, with over a quarter relying on overdrafts and just under a quarter stating credit cards fill the cash flow gap. As we’ve seen, overdrafts and credit cards lead to increased debt at a time when a business really needs a more flexible option.

An Invoice Finance solution is often a better funding approach which alleviates your debt risk.

Unlike a loan, credit card or overdraft, Invoice Finance does not involve your business borrowing more. Instead, Invoice Finance offers businesses access to money available from outstanding invoices, allowing you to access money that you’ve already earned but not yet received, because your payment terms could be anything from 30 to 90 days.

Capital unlocked from having an Invoice Finance facility can be used for a number of growth options like securing new contracts, upgrading equipment, taking on more employees, increasing supplies and even be put towards Merger and Acquisition activity or fund a Management Buyout.

An Invoice Finance facility can lead to growth not more debt.

Want to find out more?

Bibby Financial Services has been shortlisted in two categories at the prestigious Financial Services Awards 2024 – Specialist Lender Award and Customer Experience Award.

To help you find the best solution for your business, our team of business funding experts are on hand to make sure you make the right decision. Contact us or call the team direct on (01) 506 0153.