Business borrowing – why scenario planning pays

Scenario planning is often associated with large multi-national businesses facing a myriad of threats and challenges across multiple industry sectors and geographies.

It should, however, be considered a business-critical step for any business that is looking to take on debt to fund growth. 

It is a surprise how many business leaders make big decisions based on a ‘gut’ feeling. Whilst instinct should be not be dismissed, it needs to be backed up by data and quantified insights, and no more so when it comes to debt funding. 

Scenario planning is a rigorous process that looks at every possible instance that can affect a business. In terms of funding, that might include changes to interest rates, the impact of an increase or decrease in sales, the likely success of a new venture to the departure of key members of the team.  

It will, in short, help a business owner determine whether the risk is worth the reward. It will help identify those instances that might affect the ability of the business to service that debt and the return a business can expect on making that investment.  

Interest rates and scenario planning

Importantly, and with interest rates remaining high and continued economic uncertainty, it is something lenders expect to see evidenced by businesses – and that does not mean a few hastily scribbled figures on the back of a notepad! 

Typically, lenders want to understand how businesses will use the money being advanced, the impact it will have on the business and the ability to meet repayments.  

It is also a fundamental exercise in determining whether a business should borrow now or wait until interest rates fall further, looking at the impact of both scenarios. 

Scenario planning is a clear demonstration to lenders that the business is well managed and competent and confident in its growth prospects, that it recognises the risks and has plans in place to address those. It demonstrates a high degree of trustworthiness. 

Scenario planning can also unlock the best lending options for a business. For example, it might show that whilst a business may want to access £300,000 in funding over say 12 months, its primary objectives could be met with just £200,000 initially. Here, funding at the initial £200,000 could be fixed, with a further facility available with interest charged only when accessed. The outcome being the business is borrowing less on day one and paying less interest.  

How Kreston Reeves can help

We work with businesses of all shapes and sizes and can support those businesses in exploring different scenarios and the financial impact that might have. We also work with a variety of lenders and can help businesses unlock the right funding option for every opportunity.