Five reasons why debt doesn’t have to be a four-letter word
Borrowing money to grow, diversify or enter new markets is fundamental to the success of most businesses, yet owner managers can be wary of lending and the processes involved with it. So, in this blog I’m going to look at five common obstacles that can hold businesses back from borrowing in the first place, make them reluctant to increase their gearing or prevent them from reviewing or restructuring their debt to meet current needs. I’ll then look at how to overcome these obstacles to accelerate growth and reach your objectives.
Let’s start with a fairly basic psychological observation that, no matter how sophisticated we may be as business people, many of us were brought up with words ringing in our ears about the need to avoid getting into debt. It’s surprising how this can linger. I’ve spoken to many owner managers who are proud to have got as far as they have without the need to borrow. But how much further might they have got by leveraging the capital that debt markets can offer?
There are two aspects to this argument. The first relates, perhaps, to being a little too modest; along the lines of, “Who would want to lend to me?”. This view can come from surprising sources, including the owners of thriving business that lenders would be only too happy to help.
The second reason is more firmly based in business reality. Companies generally have much fewer assets than they did in the past. Typically, offices are leased and the real value in the company goes home every night. In fact, intangible assets are now estimated to make up over 80% of business value.* So, many owner managers feel that they won’t be able to borrow money because they don’t have anything to borrow against. Or they fear that a loan would involve committing their home as collateral. The good news here is that there are plenty of options in the debt market for loans with no charge over assets, no onerous debentures, warrants or personal guarantees. One example is the fully unsecured loan offering from SME credit specialist Caple.
Before the financial crisis, owner managers knew exactly where to go to get a loan: their bank. The financing options were relatively limited and the relationship was already established. Now, it’s a different picture. As SME bank lending receded, many forms of alternative lenders filled the vacuum. We talk about this in more detail in this previous blog, but the upshot is that a great deal of asset managers and other non-bank lenders now offer a huge variety of lending arrangements covering a much wider range of circumstances.
The positive outcome of this change is increased competition between lenders, driving down pricing and creating a huge amount of choice. However, it can be tricky to navigate the maze of lenders and deals out there. Owner managers’ experience is typically in their business and sector, not the vagaries of the debt markets. It’s therefore unlikely that an owner manager will have heard of many of the new entrants, let alone how to access their funds or present themselves as an ideal candidate.
The cure to all this complexity is expert advice. And as well as cutting through the maze of options to find the right lender for your business at the right rate, right now, we can continue to look out for your needs in the future as you and the debt markets continue to evolve.
Of course, the cost of servicing debt must be carefully considered before any action is taken, but in the current interest rate environment and with the low level of debt most small businesses carry, this is likely to be manageable. Many are, however, wary of the perceived costs that may result from taking professional advice to help them navigate the debt markets. I’ve even seen companies take on an intern to gather information about all the deals out there rather than ask for expert advice.
There are two ways to overcome this obstacle. The first is to understand that in almost all cases fees are contingent: they are only payable when a suitable debt has been identified, approved and arranged. Secondly, a DIY approach is likely to be counterproductive because keeping up to date with all the options out there and understanding their nuances is a full-time job that requires experience.
While owner managers are constantly changing and adapting to their customer and market needs, some can be much more reluctant to change their lending arrangements. But do those arrangements still suit your needs? Is the pricing competitive? I’ve seen businesses still grappling with the original funding that they set up many years ago, with extra lines added, extended and renewed over time so that the administration, as well as the high initial pricing, is creating a drag on the whole business. The value of our debt restructuring expertise is to help you identify and arrange the right deal, based not only on current market offerings but a deep understanding of your business and future plans.
Having concentrated on the obstacles and how to overcome them, it’s worth rounding off with some of the benefits and opportunities that debt can help you access. At Shaw & Co, I’ve seen companies use debt of as little as one to two times their annual cashflow to successfully scale up, diversify, update technology and employ the key people they need to shore themselves up for the medium term.
While taking on debt should never be taken lightly, leveraging others’ capital can provide the key to unlocking and accelerating growth, helping you get where you want more quickly and more successfully.
* ICAEW 2017 (Intangible assets represented 17% of market value in 1975 and by 2015 had risen in some sectors to 87%)