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The Cost of Money: Key Considerations When Borrowing Money

Updated: Aug 11, 2021

The UK economy, and indeed most major economies, are forecast to grow significantly as we come out of Covid-19. Even as the UK adjusts to the new world post Brexit, it is predicted there will be a positive impact, although somewhat slower than the Covid-19 recovery. So with this news of potential growth on the horizon and hospitality back open ahead of what looks to be a busy summer for Wales, if you’re a food or drink business now is the time to take a good look at your finances to assess if you have the capacity to meet what could be a significant uplift in demand for your products. How can you fund the working capital required to produce the stock?

You might be thinking about borrowing to support your cash flow, especially with the Bank of England base rate at its lowest level in history. Recent feedback from leading banks in Wales confirms that they have a positive appetite for lending to food and drink businesses. Well-presented, viable propositions will be considered in a favourable light.

So, what are the key things to consider when preparing to apply for bank facilities:

- Provide evidence that funds will be forthcoming e.g. confirmation of orders from major clients, copy emails confirming proposed sales, etc.

- Clearly point out where repayment of the proposed debt will come from. Leave them in no doubt.

- If possible, provide a secondary source of repayment should plan A not come to fruition.

- Forecasts – Cash flow forecasts and Profit and Loss forecasts are essential. You will inevitably be asked for these, so be prepared.

- Prepare answers for inevitable ‘what if’ questions.

Where possible, ask for quotes from several banks, and don’t be afraid to let them know that you are shopping around for the best deal!

The Cost

How do you decide which is the best deal? You firstly must understand the gross profit margin (GM%) you are making from each of your products. If you are borrowing to finance production of a product with GM% of say 40%, then you shouldn’t mind paying 10% for the money to do so. However, if your GM% is only say 12%, then seriously reconsider!

Make sure you fully understand the bank costs before signing on the dotted line. Have you negotiated:

- Interest rate – for loans consider requesting a quote for a fixed rate to give assurance/certainty.

- Fees – negotiate, is this the best they can do? Any special offers e.g. Government backed Covid Recovery Loan Scheme.

- Term/period etc. make sure it’s affordable, and where possible re-negotiable in the future.

Wyn is a Sustainable Scale Up Cluster Regional Cluster Manager with 37 years’ experience in the banking industry. If you would like to discuss raising finance with Wyn get in touch here.

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