I hate the thought of being in debt. Should I take one of these government-backed loans?
This is a question I’ve been asked by many business owners in recent weeks. There are lots of people who have a real fear of being in debt. The thought of it makes them feel sick. I’ve spoken to business owners who have said they’d rather cash in their savings and investments to avoid taking on debt.
They follow the advice from Shakespeare’s Polonius to the letter, without understanding the context. It’s one of those quotations that has been unfortunately curtailed. In Hamlet, Polonius counsels his son Laertes before he leaves to visit friends in Paris, saying: “Neither a borrower nor a lender be; / For loan oft loses both itself and friend.” In other words, do not lend to or borrow money from a friend. If you lend, your friend will avoid paying you back; if you borrow, you will lose your savings or future income to repay the debt. In either case, you risk losing both your money and your friend. But we’re not talking about borrowing money from a friend.
Before going further, allow me to share a little bit of the so-called small print. I’m not offering any personal financial advice. That is an activity regulated by the Financial Conduct Authority, and I am not an FCA-authorised person. I’m giving my perspective as an experienced CFO and business owner who works exclusively with SME business owners. Over my career, I have taken out and repaid more than £40 million in loans, so I know a thing or two about debt.
Let’s turn to the big question: should you take out one of these government-backed loans?
The answer really depends on what you are going to do with the money. Taking on debt is a sensible thing to do if you plan to invest the money in your business by buying or developing assets and marketing them, because assets are the things that help you to generate future income. Income that can be used to repay the loan.
Let’s take a practical example. Let’s assume you run a business that teaches people whatever your magic sauce is, and you do that by way of live, face-to-face events. You might be a consultant, a personal trainer, an HR advisor, or a specialist in digital marketing. Many businesses do that kind of thing, and they’ve been hit hard by Covid-19. To survive and thrive in the post-Covid world, those businesses need to pivot to provide their training in an online environment, and they need to ensure they can maintain quality standards. They don’t want to be “another webinar”. To achieve that successfully, they will need to invest in technology. They will need to film their presentations professionally, develop supporting online content, maybe even a new, purpose-built website, and build the online training program using software like Kajabi. Then they’ll need to market it. All of that costs money. All of it is an investment in the future of their business. An investment that, if done properly, will generate more than enough income to repay the debt they’ve taken on.
Those of you who have read my book Add then Multiply – how small businesses can think like big businesses and achieve exponential growth may recall the story of the first bank loan I ever took out. I was 14 years old and there was an asset I wanted to buy. In case you haven’t read my book, here is the excerpt:
In 1976, my first exposure to fundraising was taking out a bank loan. That year, Canada hosted the Summer Olympics in Montreal. Canada is a big country and Montreal is about 3,000 miles from Victoria, but the whole country was gripped with excitement. I had recently become interested in numismatics (collecting coins) and the Royal Canadian Mint had just announced a special series of coins to commemorate the 1976 Olympics. The full set of coins, which were offered in a collector’s presentation box that included a $20 gold coin and a specially printed dollar bill, was on sale for $300. I really wanted this for my coin collection, but I only had $100 in savings.
I remember talking with my dad about this, and he said that he would take me to see his bank manager to talk about getting a loan so I could buy the coins. Dad explained to me how loans worked: that I would have to make monthly repayments and that there was an interest charge to pay as well. We made an appointment with the local bank manager (back when banks actually had branch managers who made loans – but that’s another story). I got dressed up in my best clothes and went downtown with Dad to meet his bank manager.
I told the bank manager about the coin set that I wanted to buy, and that I had $100 saved up but needed an additional $200. I told him that I had a steady income from the newspaper collections and that I could afford to pay back $10 a month. We talked about how I managed my money, how I had saved up the $100 and why it was important to me to buy the coin set. Out came the forms, which I signed (and Dad countersigned), and presto! My bank account had $300 in it and I was able to buy the coin set.
That was my first acquisition.
I have a crystal clear memory of walking back to the car with Dad, and him saying to me, ‘Now, David, there is one important thing you need to remember. What you borrow, you must pay back.’ Those words have stuck with me throughout my life. Over the next two years I made sure to put at least $10 into the bank account every month to repay the loan. I didn’t know it at the time, but when I turned sixteen, I had a good credit rating.
As a result of that early experience, I understand debt and am not afraid of it. However, I am also aware of personal stories from friends and business contacts who had very different experiences with debt as a child or young adult. Experiences that have coloured their view, and in a few extreme situations have substantially altered their approach to business life.
Those extreme cases may require professional help, which I cannot give.
What I’m setting out here is something that will help most business owners to answer the question: should I take one of these government-backed loans?
Taking one of these loans will put cash into your business. Cash that you will have to repay, but let’s stop for a moment and look at it. Let’s say you take out a BBLS (Bounce Back Loan Scheme) loan for £50,000. There is no personal guarantee on this loan, so your personal assets (house, car, pension, savings, everything!) are safe. Should your business go bust, the lender will seize whatever assets are in the business to satisfy part of the loan. The government covers the rest. So even in the worst of possible down-side scenarios, you might lose your business, but your personal assets are safe. Don’t underestimate just how huge that is. When you went into business in the first place there was always a risk that you might lose it.
Your personal assets remain safe. You can always start another business.
Several entrepreneurs have suggested to me that they would rather cash in their savings or sell some investments to put cash into their business. It’s certainly an option, but not one that I would recommend. Just think about it: those savings and investments are your personal assets. They cannot be touched under the terms of a BBLS loan, nor under a CBILS (Coronavirus Business Interruption Loan Scheme) loan of less than £250,000. That is your hard-earned money. Keep it for yourself. As for selling investments, this is probably the worst time to think about selling investments. Global stock markets are down by 25-30% and some even more than that. Now is most certainly not the time to be selling investments.
Let’s take a closer look at the numbers involved with a BBLS. The interest rate is fixed at 2.5% and there are no repayments in the first 12 months. There are no fees associated with taking the loan, which has a fixed term of 6 years. Payments commence in month 13, and you can repay the loan without any early redemption penalties. So that’s cash in now and no cash out for the first 12 months. Repayments are very affordable:
- On a £10,000 loan the monthly repayments in months 13-72 are £177.47. Over the life of the loan that’s total payments of £10,648.20. Imagine that. Ten grand of cash in your business now, and over 6 years it only costs you £648.20.
- On £20,000 the monthly repayments in months 13-72 are £354.95
- On £50,000 the monthly repayments in months 13-72 are £887.37
Coming back to my original argument, if you are using the funds to invest in assets for your business, assets that will generate future revenues, you now have a clear picture of what you need to do. Let’s say those assets cost you £20,000. You have 12 months to get the assets right, to ensure they are working properly and delivering a revenue stream. As long as that new revenue stream is more than £354.95 a month, it has been a good investment because you are able to pay off the loan from the new revenue stream. If it’s working really well you can pay off the loan even faster, and there are no early redemption penalties.
If you don’t yet know what assets you want to build, you can still take out a BBLS or CBILS loan, leave the money in the bank and pay it back within the first 12 months and it has cost you nothing.
My first “grown up” job was working in a bank, in 1980, so I’ve been in the game called business for 40 years. Never in those 40 years have I seen anything like the CBILS and BBLS loans. This is undoubtedly the cheapest money I have ever seen. It’s backed by the UK government and there are no charges on your personal assets (unless you take a CBILS loan of more than £250,000), which is almost unheard of in SME lending.
I have recommended to all of my clients that they should at the very least take out the maximum BBLS loan they can, which is 25% of your 2019 turnover with a loan cap of £50,000.
This really is a once in a lifetime opportunity. Think carefully before you reject it.
Applying for a BBLS loan is incredibly easy. It’s all done online. It takes about 5 minutes to answer half a dozen question and the money is in the bank within a week, sometimes within a day.
Applying for a CBILS loan is rather more complicated. You need to produce a business plan with financial forecasts showing your business as it would have progressed under normal circumstances and as it has been affected by Covid-19. You also need to submit your last 3 years’ accounts. The process is typically taking 3-4 weeks, although fintech providers like Funding Circle and Starling are faster (and more expensive).
If you’re still not convinced and would like to have a chat with me, or if you want my help in putting together your loan application, send an email to Taryn in my office on taryn@addthenmultiply.com with the subject line “BBLS/CBILS help please” and she’ll set up a call.
To your future success!
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