Business debt - good vs bad business debt explained
The economic impact of Covid-19, soaring inflation and interest rates, along with cash flow challenges linked to supply chain constraints have led to a surge in smaller business borrowing.
According to the Bank of England (BoE), one-third of SMEs hold debt levels more than ten times their cash balances, compared to just 14% pre-Covid.
Unmanageable debt can be damaging for smaller businesses.
With UK Government Covid-19 support schemes wrapped up, the BoE's Financial Policy Committee (FPC) has predicted that business insolvencies are expected to increase from historically low levels.
Yet not all debt is bad.
Managed and serviced correctly, debt can provide a cash injection that can help businesses grow, expand into new markets, invest in new technology, or acquire other enterprises.
Debt is an integral part of the business lifecycle.
Debt can be used to launch a new venture, such as through the British Business Bank’s Start Up Loans programme that provided £126 million in funding in 2020, through to investing in and scaling established businesses.
The challenge for smaller businesses, especially against the backdrop of increased costs, is tied to unplanned or poorly managed debt.
Outstanding customer payments, unexpected capital costs such as plant or equipment repairs or replacements, and pressures on overheads such as salaries can see businesses take on expensive short-term loans or be unable to repay existing debts.
Good debt vs bad debt
Understanding the difference between 'good' and 'bad' debt can help your smaller business's financial planning and ensure that debt is used actively for growth rather than reactively to tackle problems.
Read our guide to the different types of external finance for your business.
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Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.
Securing funds and controlling debt
Funding can be critical to keeping a business afloat and positioning it for long-term success, especially in uncertain financial times.
But, knowing the right place to turn to for guidance can be a challenge.
With tips on everything from debt and equity financing to accessing Community Development Finance Institutions, our Guide to Building Business Resilience could help your business prepare for the future.