Growing businesses can often be “debt-averse”, preferring to issue equity rather than borrowing under debt funding instruments. This point of view is understandable as debt has to be repaid together with interest (unlike equity), and in the context of consumer finance debt is frequently demonized, but sometimes debt funding is the right choice. Taking on “good debt” – meaning borrowing at the right price and terms – can be a better and cheaper way to fund your business as interest payments can be deducted against income for corporation tax calculations.
If your business has already taken on some debt, perhaps to fund growth or to provide working capital, it makes sense to review your options, to improve the costs or terms of servicing that debt. Business circumstances, plans and requirements change over time and so do conditions in the funding market. It is therefore recommended that you should regularly review your position to make sure you benefit from the best available deals.
In some cases, businesses have debt in a number of forms, including overdraft, loans, or asset finance. Some of these may be more expensive than originally planned, or have onerous terms attached, others may have become less attractive due to changes in interest rates or new products becoming available. Your changing requirements may be better served by switching products with a different repayment term or better loan conditions.
Whatever the reason, it’s important to know that you are able to consider the various options to replace your “bad debt” and access “good debt” finance on better terms.
What are the Options?
Funding options include both long-term and short-term products. It’s important to choose the right products for your specific needs. It’s also essential to synchronise the finance requirements and the business goals, to ensure they are well matched.
REFINANCING is the act of borrowing ‘new’ money in order to pay a debt that you already have.
RESTRUCTURING is the process of changing the form of a company’s debt, so that it can pay what it owes on different terms and continue to operate.
RENEGOTIATION is the process of paying a debt over a different period of time than originally agreed, or paying back less than the original debt.
The most important consideration is to choose the right solution for your needs.
- Make sure that you get a full, expert and independent assessment of the solutions which best match your requirements;
- Make sure your business plan includes the use of the funds and servicing of debts;
- Understand the longer term implications of each option, including any risks e.g. personal guarantees, before you take on any new debt.
EFM’s Finance Directors and Business Advisors are independent experts who can provide expert analysis and advice and hep you to make the right choices for your business.