Four Reasons Successful Businesses Borrow Money

1. Start-up costs have to be paid

Every business needs some form of investment before it can start trading. This could be something as simple as a computer, a telephone and an internet connection, but most need more. There’s premises to trade from, stock to sell, marketing to promote the business and, of course, something to pay the staff – even for just a sole trader.

The money for this could come from many sources. Some business owners take out a personal loan, or use credit cards as a form of flexible finance. The money may even be borrowed from friend or family.  Find out more about how to finance a start-up.

2. Working capital is needed to keep cash flowing

Typically, suppliers need to be paid before customers settle their debts and this puts continual pressure on cash flow. Keeping this cycle moving, and to avoid running out of money, demands that a certain amount of money is available to the business at all times — working capital.

Over time, the business can finance working capital out of profits, but this only comes after a period of successful trading. If the business is growing quite fast, the capital required could always be ahead of the surplus generated from trade, meaning continual borrowing is needed.

3. Use the investment to make more than it costs to borrow

This is one reason why many firms of all sizes continue to use credit, even when they’ve been trading for years. Using the funds to generate enough profits can more than cover the cost of borrowing!

Taking out credit, whether it’s a business loan, invoice finance or an overdraft, allows investment in more sales, creating more profit. Successful businesses spot opportunities in the market and borrow the funds they need to seize the moment.

Asking how much it costs to borrow money is often the wrong question. Ask instead: “What’s the difference between how much you can make and how much it costs to borrow?”

4. Borrowing money reduces personal risk

It may seem odd for your business to borrow money when you’ve already got personal savings that you could use. But clearly you saved that money for a reason — perhaps to fund children through education or provide for your retirement.

Whatever the reason is, if you tie up that cash in your business, it won’t be available for the original purpose, or for any personal emergencies that crop up.

Taking out credit for your business offers a number of benefits and can really improve your chances of commercial success.