Good debt versus bad debt - British Business Bank (2024)

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.

Good debt versus bad debt - British Business Bank (2024)

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