Why companies should finance their business in good times
“Financed when you’re alright,” says Dr. Nico Peters, CEO of Marchmain family. We explain why it is often cheaper to finance than to pay yourself.
The economic situation for SMEs is currently excellent – despite the weakening economy. Many companies have enough liquid funds to pay for investments out of their own assets. But is that really the best option? A plea for debt financing in good times:
“Buy only what you can pay.”
A wisdom that many parents and grandparents have given the children and grandchildren on their way into their own lives.
A very good piece of advice, but as many tips are not generally valid. Especially entrepreneurs who look good economically and want to invest in the further success of the business in this situation, should not take this wisdom too much to heart. After all, there are good reasons for holding the liquidity that has been gained in the company and instead relying on a currently very favorable debt financing.
You get the financing faster and easier
Quite simply expressed: Who does not need money, it gets easier. In good times with good order books, solid sales and generally good liquidity, companies are also more likely to get loan approval from a financial services provider.
The financing is usually cheaper
Debt capital is always cheaper than equity. Due to this so-called leverage effect, companies should always consider whether it makes economic sense to resort to borrowing (at least in part) for an investment.
Especially when the company is in a good position economically, this consideration counts twice, because banks have to offer so-called risk-certified interest rates. In other words, the better the company, the better the interest rate.
Liquidity reserves for “bad times”
Financing, if you had the funds you need for the investment yourself, you can put your own liquidity reserves aside and then use them freely in case of unforeseen situations – for example when periods of economic weakness require spending and investment. These reserves are particularly valuable when it would be more difficult to get a loan in bad times.
Free choice at the financial providers
Without the pressure in the back, that necessarily a financing must be found, can be quiet and more prudent on the search for suitable providers go. A well-balanced comparison of providers not only improves transparency in the financing process, but also the conditions themselves. If you seek a loan under high pressure of success and with little equity as a backup, not only are the selection options usually lower, but so are the conditions with regard to the interest rate. Term, collateral and co worse. Say: While you can choose the financing partner in good times, you have to take what you get in economically tense times.
The current good situation on the financial market
The currently favorable situation in the commercial finance market allows companies that want to borrow with a good equity ratio and sufficient collateral to make the terms very positive. If this situation changes, for example as a result of an ECB rate hike or a weakening economy, as we have already observed in various forecasts, a company loan automatically becomes more expensive – interest rates rise, more collateral is required to minimize the risk. The company’s reserves “decline” in value as more collateral has to be spent and more own funds raised to get financing that may even have worse terms.
Anyone who is good today should preserve this situation – and still invest in the future. Financing for companies is currently very favorable due to low base rates and the good economic situation. Especially successful companies with cash reserves should not use them for long-term, high investments, but also rely on borrowing, as long as the cost is low – and only use the reserves when this situation changes. This saves companies as a whole and at the same time gains their own ability to act and flexibility.
All reasons at a glance:
- Currently very favorable financing conditions
- Equity remains free (cash reserves)
- Fast access to debt financing
- Cheaper conditions
- Free provider selection
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