The Hidden Cost of “never borrowing again”.

What is the hidden cost of never borrowing again?

At some point in conversations with business owners, we hear a version of the same sentence: “We don’t borrow money, and we never will again.”  Usually it is said with pride. The business survived difficult trading conditions, paid off a bank loan, or was built entirely from retained profits. Becoming debt-free feels like a milestone.

To be honest, there is absolutely nothing wrong with wanting a financially resilient business. The question that we think is worth discussing is does refusing all external finance actually help a business grow, or can it quietly become a constraint?

This is not just anecdotal. The UK’s SME Finance Monitor gives us a useful way to examine the issue.

A surprisingly large group of businesses say they will never borrow

The SME Finance Monitor refers to these businesses as “Permanent Non-Borrowers” (PNBs).  They are defined as businesses that:

• are not currently using external finance; and
• say they have no intention of using it in the future.

According to the data, around 35% of UK SMEs fall into this category. That is a significant proportion of the business community.  What is equally interesting is that around 45% of SMEs do use some form of external finance, meaning finance users now outnumber permanent non-borrowers. The remaining 20% don’t use finance but would consider it.  So, the debate is not really between a small group of borrowers and a large group of debt-free businesses. It is a genuine split in how UK business owners think about growth.

Why do business owners become permanent non-borrowers?

In our experience, the most common explanations that we hear are:

• “We had a bad experience with a bank.”
• “Interest rates are too high.”
• “I don’t want anyone telling me how to run my business.”
• “I was brought up to believe that debt is dangerous.”
• “We survived without borrowing, so why start now?”

All of those concerns are understandable.  Many owners remember the financial crisis, COVID disruption, or periods when access to funding became uncertain. Others have worked incredibly hard to pay off business debt and are determined not to return to it.  The problem is that these experiences can lead to a broader conclusion that if they had a previous concern with a particular type of finance then all external finance is risky.

The hidden assumption behind “we never borrow”

When a business says it will never borrow, it is effectively making a strategic assumption that future growth can be funded entirely from existing cash flow.  For some businesses, that is true.

A stable services business with low overheads and modest growth ambitions may never need external funding.  But many SMEs operate in sectors where growth creates additional working capital requirements such as Manufacturing, Wholesale, Recruitment or Transport to name a few.

In these sectors, winning more work often means buying more stock; paying more wages; increasing production, or waiting longer to get paid.  In other words, growth consumes cash before it generates cash.

Profitable businesses can feel cash-poor

A business can be profitable, busy, winning new customers, and still experience cashflow pressure. For example, if a business increases its turnover from £2m to £3m and its customers pay in 60 days, that extra £1m of annual sales can create more than £160,000 of additional money tied up in unpaid invoices.

When owners choose not to use any form of external funding, they often absorb that pressure themselves resulting in decisions to delay recruitment, reduce stock levels, focus on smaller customers or turn down larger contracts whilst constantly monitoring their bank balance.

In reality they aren’t borrowing but they are using their own cash as working capital for their customers.

Is invoice finance really borrowing?

This is where terminology matters. Many permanent non-borrowers picture finance as a traditional bank loan: a fixed amount with fixed repayments and an additional debt on the balance sheet.

Invoice finance is different.  The business has already completed the work and issued the invoice.  The question is simply whether it waits 30, 60, or 90 days to access the cash.  We often describe it less as “taking on debt” and more as releasing the funds you’ve already earned without waiting for customers to pay.  That distinction matters because many owners who say they would “never borrow” are comfortable with taking customer deposits, or credit with suppliers, using credit cards, or leasing equipment.

Smaller businesses most likely to avoid finance

The SME Finance Monitor shows that  very small businesses are much more likely to be permanent non-borrowers.  Larger businesses are generally more likely to view finance as a management tool whereas smaller businesses are more likely to view it as a personal risk. This difference in mindset can become important as a company grows.

The question is not “Should I borrow?”

We think many discussions about business finance start with the wrong question, asking should they borrow money, when a more sensible question would be what return would additional working capital generate?

If access to £100k allows a business to take on a larger contract, buy stock at better margins, recruit earlier, or avoid turning work away, then the cost of finance versus the value of the opportunity becomes more transparent.

Our point of view

We are not arguing that every business should take on external finance.  In fact, some businesses are genuinely better off growing slowly and funding everything from retained profits.  We would argue that permanent non-borrowing is not automatically a sign of financial strength.

We have shown that it can be a reaction to past experiences, a misunderstanding of available funding options, or a strategy that unintentionally limits growth.

The SME Finance Monitor reveals that a large proportion of UK SMEs have decided they will never use external finance, but our experience tells us that many of those businesses are not lacking demand, they are lacking working capital flexibility.  The businesses that grow most consistently are rarely the ones that use the most finance, they are usually the ones that use the right amount of finance at the right time, whilst keeping control of cash flow.

Being cautious with external finance is sensible.  Being permanently closed to every form of funding may be a much bigger risk than many business owners realise.

Martin Bennison, Sales and Marketing Director, Pulse Finance

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