When should your business borrow money? And yes, there will be times when it's good for your business to borrow. There will be times when it should be avoided.

Planning, attitude, risk, and cost. These are the four things you need to consider when borrowing money for your business.

This weeks episode of I Hate Numbers will cover these topics in detail so that you can make a sound decision about whether borrowing is right for your business. You will also learn how to avoid common pitfalls and mistakes that many businesses fall into when they borrow money for their company.

I want to help you succeed with your business by making sure it's financially stable from day one! So, let's get started on our first topic - planning! To start off, we will talk about what makes a good plan and why it's important to have one before taking out any loans.

Your cash flow forecast is key to any business decision

Firstly, you should not undertake any borrowing decision, until you have looked at your business future. Planning is key, borrowing a British Army phrase, Proper Planning and Preparation Prevents Piss Poor Performance.

Above all you need a plan that has the three key ingredients your business purpose, end goal, and your route map to get there. Convert your story to your financial plan, your future cash flow story. Then decide whether you should borrow money, or not! As a heads up, I have got a FREE cashflow workshop webinar coming up in May, click to find out more.

Listen to find out more.

Your attitude, your money mindset matters.

What is your attitude towards debt and your attitude to managing money? Debt has a bad press. Borrowing money, the right way, and with the right money mindset will boost your business growth.

Those memories of those early days when I started my own business over 26 years ago and I borrowed money are still fresh in my mind.

I was not the businessperson then that I am now and I was running my start up from my back bedroom. More money out than coming in. My head was still hurting making that transition from an employee to working for myself. Cash was needed to keep my dream and ambitions alive.

Borrowing money, on top of using my own savings, and working ‘part time’ fueled my business survival, and growth, but not without the financial and emotional costs.

Listen to find out more.

Borrowing money and risk

Thirdly, let’s talk about risk. More importantly, your risk appetite and managing your risk when you borrow money.  When you take on debt you take on a commitment, more fixed costs. This will affect your business risk, your operational gearing, what a wonderful term?

Thinking about your attitude to debt. Is it one that's the attitude of others? Have you had bad experiences before with debt? You are cautious about having that happening in your own business?

What is the cost of the loan?

You need to look at the cost of the debt, the investment you will be making. The interest rate charged is the lenders profit. The type and length of the loan, your own credit history, the purpose of the loan, the lenders assessment of the risk they are taking feed into the interest rate. For larger and riskier loans, a lender will ask for your management accounts. Make sure your financial house is in order and your financial records are up to date, Digital Accounting is what you need.

Check out the loan terms, the interest rate, your monthly commitments. Use my FREE online loan calculator.

Listen to find out more.

Conclusion

The question, When should your business borrow money? It’s all about P.A.R.C

• Planning, make sure you have one.
• Attitude, what is yours? Is it one that should be addressed?
• Risk, understanding and managing it.
• Cost of the loan.

If you do not want your business to go backwards, then you must plan for growth. Borrowing money is a positive way to make your growth happen.

I would love it if you could share this podcast and Number love with your network and help me with my mission of getting your business closer to your numbers, make profit, save tax, and time and strengthen your money mindset.

Numbers are your best friend in business, they won’t lie to you, they provide focus and clarity, lessen your money anxiety.

You do not have to worry about making these decisions alone! Contact us to see how we can help you figure out the question “When should your business borrow money? Our news section, FREE online calculators is there for you. Just click here now to get started!

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

When should your business borrow money? And yes, there will be times when it's good for your business to borrow and there'll be times when it should be avoided. Hi folks. My name is Mahmood. I'm an accountant running their own accounting firm, and it's my mission in life to help your business make money,

by money, I mean profit, save tax, and time, and up your money mindset. Now, I love numbers. The world of numbers is something that relieves anxiety, helps you achieve all those goals in your business life, and it's one thing in your business that will never lie to you. It'll be there in good times and bad times.

And my objective in these weekly podcasts is for you to get a bit closer, de-jargonise the conversation, and make you aware of those things around you that you may be divorced from. Okay, let's crack on with the broadcast. In this podcast, I'm going to be sharing four tips with you to how you deal with borrowing money for your business.

Now, I've got a handy new mnemonic that summarises these four tips, and it's the mnemonic PARK, which is about planning, attitude, risk, and cost. Now, firstly, you should not undertake any borrowing decision i.e commitment to a loan until you've actually, at least, figured out which direction your business is going, what your business is going to look like over typically the next 12 months to three years, and you need a plan.

And that plan has three key ingredients. It's defined by your business purpose. It has an end goal, and then, it has a root map as to how you get to that end goal, and underpinning all of that is a cash flow forecast, a financial plan that shows you in cash terms, in money terms, money coming in and out of your bank account, how your business shape is going to develop in the future.

Then that's when you make your decision, as to whether you should be borrowing money or not. So, typically if your business is a startup business, you'll be looking in terms of what level of sales you're likely to generate. You are looking in terms of the level of investment that you need to make in terms of marketing spend.

You'll be looking in terms of what capacity that you need for your business in terms of personnel. If you're manufacturing, are you going to be outsourcing or internally manufacturing? And once you've figured that out, then you have to look at where the cash gaps are, and borrowing money can be one way to supplement that gap.

If your business is pivoting, so you are diversifying into new markets, you want to try something new, you are developing a new product or a new service, you are going to be doing the same thing. You need to look at how that develops over the next few months to a year. Plus, think about what you need by way of resources to make it happen.

So, typically, do you need to acquire new skills? Do you need to invest in machinery and equipment? Do you need to bring in additional personnel from outside, freelancers, or otherwise? Once you figure that out, then you translate that into money terms, do your cash flow, and then see where the gaps are, and it's absolutely reckless for you to embark on a boring decision until at least you've done a cash flow forecast, which mirrors your future financial activity.

The second thing you need to consider is attitude. Now, you might call that money mindset. I'm going to call that attitude for now. What is your attitude towards debt and also your attitude to managing money per se? Now, debt has accumulated a very negative persona over the years, and I remember going back 26 years ago when I started my business, I borrowed money for a number of reasons.

I didn't actually handle it very well, which I know sounds a bit weird for an accountant to say that, but full disclosure here. I was starting my business life and I was operating from my back bedroom. I was juggling two full-time jobs to keep the business going, hadn't quite got my head around that transition into the world of entrepreneurship and self-employment, and borrowed money, probably recklessly in hindsight,

and once I accumulated that debt, I had a mission to get rid of it, completely eliminate it, and then for a period of time, did not want to go down that route of borrowing money. However, and this is a big, however, it's about attitude. So, I had to address my own personal attitude to managing that debt. You also have to manage your thing in terms of managing debt alone.

Alone typically will be a commitment between you and the lender, where the lender will expect you to repay a monthly amount back to them. And that monthly amount could be typically the original sum that you borrowed, plus the interest on top, or it could be just the interest only, but you've got to be able to manage that effectively.

And again, that links back to your planning. If you don't have a cash flow, you don’t know what your monthly commitments are likely to be, it becomes very difficult to manage it. Debt, however, is that thing that can really, really boost your business growth. So, if we look in terms of a business trajectory, typically we are going to be having to do things now.

So, like investing in equipment, recruiting freelancers, recruiting paid staff, putting out marketing messages, all those activities that we need to do now, there'll be a time lag for customers to trust us, before customers buy from us. New staff have got to be vetted in. We've got to get familiar with the processes, and in the early stages,

what we will find is that the take-up from customers, in relation to what we're spending, we'll be disproportionately against us, not in our favor. Your mindset has got to be thinking then, if I want to move my business forward, and all businesses got to do that, all businesses should plan for growth, then you need to have the right mindset and look at debt, not as a weight around your neck, but a way for you to achieve your business goals.

And all successful businesses will have borrowed money and do borrow money. As a heads up, by the way, borrowing money has some tax advantages in the sense that the interest is tax-deductible, and also you don't lose control of your own business. Now, the third element I want to talk about is risk. Now, all of us in life have different attitudes to risk.

Some are very risky. Some are quite happy to take risks and their circumstances might be such that they're a bit gung-ho. I wouldn't say necessarily reckless that they're prepared to do things, that if their circumstances were different, they might be more cautious. Now, for me, I always believe that business owners should have a combination of risk appetites in their own business.

For certain things, you should be risk averse. So, for things like due diligence, when you take on new suppliers, new customers, when you address your own accounting systems, making sure that you kept good records, making sure that you comply with all the obligations that you are facing in your own country, then that is effectively a risk-averse attitude, and that's absolutely critical. For things in terms of moving your business forward, the risks that you take in terms of trying out new things, going outside of your comfort zone,

are things that I would recommend that you look at, but again, you've got to look at debt when you take it on. It's a fixed commitment. So, from a number’s point of view, your fixed-cost burden will increase, the level of risk in your business will increase as well, and if you've listened to previous podcasts, and if not, have a check on the podcast list,

we did a podcast, well, I did a podcast on operating rules gearing - sounds very grandiose, but basically a loan commitment is an extra fixed cost. If your business is operating positively, if there's a sales growth that could actually be very beneficial for you financially. If things are a bit turbulent, a bit choppy, then that debt burden is going to be factored in, and you've got to think about your attitude if you can handle that level of risk.

The risk also, by the way, is looking at the terms of the loan. So, what's the interest rate that's going to be charged? What's the commitments the lender expects you to enter into? And that's going to be covered more so when we look at the last attribute, and that's the cost of the debt itself. So, let's recap at this stage.

So before you even make a decision about how much to borrow, where to borrow from, over what period of time you borrow that money, then you've got to have a financial plan that underpins that. The decision follows your financial plan, not the other way round. Think about your attitude to debt. Is it one that's the attitude of others?

Have you had bad experiences before with debt? You are cautious about having that happening in your own business. If so, address it. Are you risk averse? Are you risk-seeking? And again, neither one is right or wrong. We all have different attitudes to not only debt but things in our business. What's the risk that you're undertaking by taking on that commitment?

So typically, if your sales line is quite depressed and it's not like there's something fundamentally wrong in your business, borrowing more money, increases the risk unnecessarily. Now, the last thing to consider about when you should borrow money for your business is the cost of the debt. Now, typically these are the elements that make up the cost.

There may be initial fees to pay to the lender. There may be time that you have to expand. Depending on the size of the loan, the lender may require some management accounts, some documentation, some forms to be completed, and time is money. There'll be lenders' fees. Typically, lenders make money off money.

So, the interest rate they charge, which is either wrapped up in the repayments, or at the end of the loan term, is their profit margin on that debt. And when it comes to cost, there are two types of borrowing in the main. There's something called a repayment loan. And again, we see this typically in property.

So, when you buy your home, the lender will lend you the money to purchase that house, and they will either charge you interest only on the debt, and at the end of the loan term, they expect the initial sum you've borrowed to be repaid back. Obviously, that's less on the cash flow, but that means you've got debt that you've got to find in the future.

Alternatively, lenders can have a repayment loan situation set up, and for non-property loans, that's very typical. So, you borrow the money, you really pay back the original sum you borrowed bit by bit each month, and then you add interest on top of it. As a heads up, by the way, folks, check out the show notes at the end for a link.

There's some business calculators we've got, and within the suite of free online business calculators, we've got a calculator that works out the repayments on loans. Just tap in the numbers of the amount you want to borrow, tap in how many years, what the interest rate is, and it'll work it out for you, what the repayment terms are.

It'll also do this for interest only and repayment loans. And if you're in the UK, and if you've got a bounce-back loan, it'll do it for VAT as well. So, look at that cost and then basically wrap all those things together. So, it's about planning. Make sure you have one. Do not make a lending decision, a borrowing decision until you have a plan in place.

Attitude. What is yours? Is it one that should be addressed? Is it one that's out of date, and by out of date, debt, relatively speaking these days is relatively inexpensive against the alternatives. You know, it may be relatively inexpensive. What's the risk appetite and what's the risk you are taking on by having the loan in the first place?

And C is the cost of the load. Consider all those things here. And as a final concluding thought, I would say that if you have aspirations for growth, and in my view, all businesses should have aspirations for growth. If you don't plan for growth, you'll be going backwards. Then, debt financing can be a real positive way to accelerate the growth that you want.

Make sure it's underpinned by a plan, and the finance, the loaning, the borrowing of money is one way to achieve your aspirations and your end purpose. Okay folks, hope you found this useful. Check out the show notes for some links to some free calculators, other resources, and if you need any help in terms of figuring out how to do a cash flow, I've got a link at the end.

We've got a cash flow seminar coming up on the first week of May. More details given the show notes. Hope you got some value from this podcast. I'd love it if you could share it with your friends and families and colleagues. If you love it enough to give a review, that'll be super-duper. I'm not going to get embarrassed by that.

Until then, I'll see you guys next week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.