Someone once told me "Unless a business is borrowing the maximum it can, it won’t be growing to its full potential". I've never endorsed that kind of maximum borrowing strategy - which says more about my own attitude than the truth of the statement - it's interesting to see the reaction it gets from most business owners when I say it.
Most people borrow money only when they feel they absolutely have to. They treat a business loan almost like a failure - "I couldn't finance the business from profit, so I had to borrow some money". Instead, I recommend seeing it as one of many tools available to a business owner.
A business needs available cash to stay afloat. And cash flow is even more important to the growth of a business! If you had £50,000 of available cash, how would you use it to grow your business? Employ a salesperson? Invest in some excellent marketing? Develop a new product? Chances are, whichever you choose, the return you’d generate on that money would probably be a multiple rather than a fraction. So why wouldn’t you get hold of that cash?
If you can borrow money at, say, 10% interest per year (and that should definitely be possible) and you can generate 100% return with that money, surely you’d be crazy not to raise that cash and invest it? Sometimes I encounter business owners who do have spare cash and they’re taking it out of the business and putting it in property. Now, property is a good investment - you can double your money every ten years if you take the long-term stand. But often you can double your money on ONE year if instead of trusting the property market you trust yourself and invest in your own business!
So how can you lay your hands on a nice big pile of cash? Traditionally you’d go to a bank. But these days many banks can be difficult to borrow from. After the banking crisis they’re over-regulated, over-cautious, and they’ve mostly disconnected from small and medium-sized businesses, but that’s a whole other topic. If you’re fortunate enough to have a good bank Relationship Manager, by all means approach them with a sound plan.
You might have heard of Crowdfunding? It’s where typically tens of small investors lend a small amount of money to create a larger pot with diversified risk to each lender. A couple of business clients have successfully used Funding Circle and just 8 days from posting their request they had money in their bank. Several other crowdfunding businesses are vying for the top position in this new market, I just don’t have experience with the others.
Crowdfunding is growing so quickly that I suspect it’s going to bite the traditional banks on their behind and catch them napping. Banks are big organisations that take a long time to react. Time will tell whether they react quickly enough to avoid losing much of their reason for existence.
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By: Rob Pickering
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