One of our speakers is a brilliant Corporate Financier who has personally bought and sold 402 companies, mostly SME’s, across all sectors. She gave a Business Finance Masterclass to one of our Mastermind Groups last week and was surprised how few of our member companies had any borrowings other than property related mortgages.
“Why are you prepared to borrow to invest in property but not borrowing to invest in your business?” she asked and it caused several of our members to reflect on whether their prudence was holding back the growth of their business.
I posed a further question to the Group – “what would you do if I put £250,000 into your bank account right now?” One member said he’d open an office he’s had mothballed, another said he’d complete on an acquisition he’s been pondering and a third stated she would go ahead with the rebrand she’s been planning. So I then asked, “what’s stopping you from borrowing £250,000 when there’s a huge appetite from lenders, both banks and peer-to-peer, and with interest rates so low?” and the room went quiet.
Another of our speakers, Casper Berry, (who advised James Bond on the poker sequences in Casino Royale – he’s a Cambridge economist who spent several years as a professional poker player in Las Vegas), talks about the gap between the line of unacceptability and the comfort zone. He suggests that every major decision we’ve ever taken in our lives has been made in this gap. Think about it, when you left home, bought your first place, got married, had kids, changed jobs, started a business – all of these major events were outside your comfort zone but hopefully on the right side of the line of unacceptability.
I offer the idea that many SME businesses could propel themselves to the next level with an extra £250,000, and the cost is relatively low at c.£1,000 per month in interest. Can I stress that I’m not encouraging reckless borrowing and spending, not at all, but I do feel that a zero borrowing policy is putting a serious brake on growth and development for many companies.
One final thought for those who are considering selling their businesses in the next few years – borrowing will not affect the value as the calculation most commonly used is EBITDA, (Earnings Before INTEREST, Tax, Depreciation and Amortisation) x a multiple. Borrowing to invest to sell might be slightly out of your comfort zone but for many will not take you over the line of unacceptability – it’s further away than you think.