Demystifying debt: value of debt to support resilience and recovery

Current conditions will trigger businesses to embrace debt, helping them overcome barriers to recovery


Demystifying debt

Businesses are embracing new methods of finance, such as government schemes, to support their needs through the coronavirus crisis. According to the Treasury, as of June 11, lenders had provided nearly one million businesses with more than £37 billion of finance through government-backed lending schemes. For many of these businesses, however, this is the first time they’ve taken on debt and many others remain reluctant to do so, despite the changed economic landscape.

One company trying to demystify debt and show how it can be a positive tool for change is Ultimate Finance. As a specialist asset-based lender, Ultimate Finance has been offering financing solutions for UK-based businesses for more than 20 years and continues to do so now in times of crisis.

“To say the current environment is challenging for small business would be an understatement,” says Josh Levy, chief executive of Ultimate Finance. “However, the recovery phase of the crisis could empower small and medium-sized enterprises (SMEs) to embrace business debt in a way they have never done before.”

Cash flow has always been the biggest killer of small businesses, with the Federation of Small Business estimating it puts 50,000 out of business each year. That figure is likely to be even higher this year with the Bank of England warning that the economy could shrink by 14 per cent.

While many business owners have been nervous to take on debt in the past, the current business climate means many are having to do so. Prior to the pandemic, businesses were hesitant to embrace debt, with only 45 per cent of all SMEs using external finance in 2019, of which most were bank overdrafts and credit cards.

As an external funding option, debt can offer a path to healthy growth for a new business, as well as the means to weather potential storms. “Funding is the main challenge every single business faces, whether they are a startup or a larger business,” says Levy. “As businesses prepare to embark on a period of recovery, access to capital should be their number-one priority.”

Government-backed lending schemes

The government is offering a number of lending schemes to enable smaller businesses to access finance during the pandemic. Ultimate Finance is an accredited lender for the government’s Coronavirus Business Interruption Loan Scheme to small businesses during COVID-19. The scheme provides Ultimate Finance with a government-backed guarantee to facilitate lending during a time when the borrower may not have passed normal lending criteria thresholds.

While much of the narrative around the government-backed schemes has been on standalone loans, businesses can also consider other types of debt financing, such as invoice and asset finance facilities. Levy believes that many companies are reaching the point where they need to be fully considering their long-term financing structures. Those with an asset-heavy business model, such as manufacturing firms, will need capital to buy stock from the outset, whereas other businesses might need to look at financing options further down the line to meet their cash flow needs and growth ambitions.

The recovery phase of the crisis could empower small and medium-sized enterprises to embrace business debt in a way they have never done before

Whether debt is right for a business depends on many factors, but companies often overlook it as a financing option because of misconceptions around it. “There’s a stigma associated with debt,” says Levy. “In a business context, debt is just capital to provide whatever you need. Whether that’s supporting your immediate working capital pressures, embarking on business recovery or planning for future growth, debt can be the right solution for a business in both the short term and, depending on the solution, in the long term.”

The main advantages for small businesses of debt financing over equity financing is greater availability and not having to sell off a part of the company. “With debt, you retain full control of the business,” Levy points out.

Richard Sorsky from Gable Asset Finance says: “Now is the opportune time for businesses to consider borrowing,”  evidencing the various support packages the government has offered, free from directors’ personal guarantees, combined with low interest rates.

Sorsky explains that this, alongside the increased accessibility of information, has led to an uptake in awareness. “We’re seeing more and more people coming to us with specific enquiries and, as a broker, we speak to customers to identify what their business problem is and help them find a solution,” he says.

The value a broker can add is giving an objective solution to the problem, rather than selling a product off the shelf. “You have to speak to a completely independent broker that offers a wide variety of products and services,” says Sorsky.

Levy adds: “Lenders and brokers must work together more than ever with a unified voice.” He believes impartial and professional advice from brokers and introducers is more necessary now than it has ever been, particularly to businesses seeking funding for the first time ever or looking to establish the right long-term financing structure having taken a government-backed loan.

“The industry needs to rally together and be prepared to support and educate SMEs in the opportunities debt can bring,” Levy concludes.