Debt finance: Key considerations

There are many factors to take into account when a business takes on debt. However, debt can be a good thing when it provides the business with added flexibility or supports future plans.

Consider the following before making any firm decisions

• Lenders will always take into account a potential borrower’s personal or business credit record when deciding whether or how much to lend.
• Loans are less flexible than overdrafts, and charges could be payable on funds not used.
• There may be penalties for early repayment of debt.
• Being locked into a rigid repayment schedule can prove problematic if cash flow is seasonal or erratic.
• Overdrafts are repayable on demand and so can be reduced or called in if the finance provider thinks that the business may be in difficulty.
• There are likely to be penalty charges for exceeding an overdraft limit.
• Security against the loan will almost always be required, as will personal guarantees from directors or owners.
• If a business is growing, the amount of asset-based finance will track the growth.
• Care should be taken when setting the repayment terms for a lease to ensure it is at least as long as the agreement. You can find out more from the Finance and Leasing Association.
• Interest rates in peer-to-peer (P2P) business lending are often set by the market on the platform and reflect the level of supply of business loans.

Next steps

To start your finance journey, use our interactive tool.