Chris Kelly, a director at Jacobs Allen chartered accountants, offers advice on what to consider before taking out a loan.

Small and medium sized (SME) business owners in the UK have historically been reluctant to take on debt finance because of the general association of all debt with bad consumer debt.

However, this has changed dramatically since Covid, with the introduction of the Government-backed schemes such as Bounce Back Loans (BBL), Coronavirus Business Interruption Loans and Recovery Loans. Since the pandemic the majority of SMEs now have some form of this type of business debt.

In order to provide the BBL funds quickly the Government even dispensed with any requirement for affordability to be considered in the application process.

The Government-backed loan schemes ended on June 30, 2022, and there are fewer debt options for SME businesses. SME businesses had become used to the availability of finance on beneficial terms and access to finance is an issue again.

The Government has subsequently announced that a revised version of the Recovery Loan Scheme will be launched in August following concerns raised by Institute of Chartered Accountants and business groups that confidence is waning and economic factors including growing inflation and staff shortages could push many businesses to breaking point.

But what is the difference between good and bad debt?

Good debt is defined as debt that allows a business to scale up and increase profits. Bad debt is usually where it is likely there is no long-term reward or benefit in taking it on.

When a business is considering taking on debt the main criteria for determining whether it is good or bad debt are:

• What are the funds to be used for?
• What growth or profit is it expected to generate?
• Can the business afford to repay the debt?

Being able to repay the debt is as important as the purpose it was used for. All debt is bad debt if a business cannot afford the repayments.

Larger businesses usually plan to obtain debt finance well in advance which gives them the best options in terms of availability and price. In contrast, most smaller businesses leave it until the last minute and this restricts their options.

Your accountant will be able to assist in your debt decision making process through their knowledge of business planning, projections and the different types and sources of debt finance.