Skip to main content

The Credit Minefield: The business no-brainers vs the business non-starters

The financial landscape has arguably never been more complex, and this is no different for credit. But there is some consistency in the credit narrative; especially when it comes to the differences between ‘good’ and ‘bad’ credit. While some may perceive all credit to be bad, for small businesses credit can be a lifeline – especially for managing cash flow. 

Unsuitable banking arrangements and a prevailing reliance on personal savings and credit accounts can stifle growth and make companies hostage to perennial cash flow problems. Research shows that a quarter of SME owners use personal savings to fund businesses,* but this could have a detrimental impact on the individual and the businesses' credit score.  

One of the longstanding reasons that business owners opt for a personal rather than a business loan is faster approval rates allowing access to cash quicker. But with too many SMEs relying on their overdrafts to get by from one month to the next, what alternative sources of finance could they consider?  

Credit has remained very easy for businesses and individuals to access thanks to the long period of low interest rates. But with inflation rates rising, it’s only a matter of time before interest rates and borrowing costs start to go up. For businesses this shouldn’t be a mass cause for concern, but any financial preparations you can make now may help you to secure the finance you need for your business at a competitive rate. 

Uncertainty has become the accepted “new normal”. And let’s not forget, we’ve been here before, the 2008-09 financial crisis, the Brexit vote - all moments when businesses didn’t know what would be next. This shouldn’t lead us to overlook current opportunities for small businesses and the positivity in the increasing number of new businesses and side hustles that have emerged during lockdown.  

For SMEs unsure of their next financial step, there are a number of options that could be right for you. A business loan has several benefits and is tailored and designed specifically for businesses. They are created with business in mind and are intended for business uses such as buying materials, paying a VAT bill or renting a new premises. There are a range of loans available in the market, so it’s important to assess current and future needs. The Federation of Small Businesses has produced a helpful guide that lists the main types of accounts available for small businesses. 

If a business loan doesn’t work for your current needs, you may be able to put your balance sheets to better use and unlock the value already there. Asset finance is a quick and simple way to unlock that value. 

How does it work? Simply put, asset finance is a loan that is secured against some or all of the assets of the company.  This is often machinery and equipment or other tangible assets, but it is also possible to borrow against stock, property, or accounts receivable.  Companies can even borrow against future cash flow.

Asset finance is often combined with an invoice finance facility. Combining both short and long term facilities in this way can free up even more value in a company’s balance sheet, by unlocking the cash held up in unpaid invoices so companies do not need to wait for their customers to pay them.

This type of lending facility can also grow in line with the business. It means money is available quickly to bridge any gap in the business life cycle – for example, hiring additional staff or for buying additional stock in anticipation of seasonal demand.  In short, it is a source of financial flexibility that is so vital for a young, growing business. 

If SMEs considering this, it is worth consulting a specialist lender; someone who can demonstrate expertise in their industry and can highlight the role that asset finance and invoice finance can play in the growth of their small business. With the right funding and specialist advice, at Close Brothers we believe that SMEs can thrive for the long term. 

Taking out a loan or opting for different finance options is a big commitment so it’s important to assess your financial situation and understand the options available to you. Comparing lenders and different funding options is important to ensure that you end up with a product that provides the level of financing you need while also having manageable repayments. To avoid damaging your credit score you should also check your eligibility before applying. A rejected application or failure to make a repayment can have a significant impact on your credit score and the financing options that will be available to you in the future. 

The Federation of Small Business has a series of helpful guides covering topics from deciding whether you should borrow to grow your business, business expenses you can claim and five ways to manage your cash flow.