When Does It Make Sense To Borrow Money?

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Borrowing MoneyIf you’re a small business owner, you’ve either borrowed money, are borrowing money, are thinking about borrowing money or will borrow money (and probably more than once) in the future. Businesses need capital — period. For all kinds of reasons.

But how do you know whether or not you should borrow? Sageworks, Inc. CEO and Huffington Post contributor Brian Hamilton says that while getting funding (most often from traditional sources like banks) can be a real challenge for small businesses, his concern is about businesses borrowing too much. In fact, he says, borrowing when you don’t really need to is one of the biggest mistakes a business owner can make. Knowing when and when not to borrow is crucial, and Hamilton says it’s not always obvious which path you should take.

Hamilton says to begin with two fundamental questions:

    • Is your business profitable?

 

    • Can you easily service the debt?



Answering the first is straightforward; the second requires some calculation. But long story short, answering both questions in the affirmative may not be enough to justify borrowing. Here’s the real bottom line, according to Hamilton: Borrow only when you are confident you can make more profit as a result of borrowing the money. When you estimate your sales and profits before borrowing and compare them to post-borrowing, will you see increased revenue or reduced costs, leading to more profit?

You can assess your situation by looking at scenarios that are conservative, optimistic and somewhere in between. But since there’s often a fine line between knowing whether you’re borrowing to grow versus borrowing just to stay afloat, it’s always a good idea to consult with your accountant, who can run an ROI analysis. There are other considerations, too, like tax write-offs and deductions that your accountant will help with.

At Business Financial Services, we share many of Hamilton’s views about when businesses should borrow money. And as a business lender, we advise businesses in much the same way: How is your revenue today? Is your business model a sound and sustainable one? How are your operations going? If getting capital from BFS will further your business’s growth and enhance your ability to grow revenue and profits, then chances are good you’re a good candidate for a loan from us. But if you’re struggling to keep the business alive, borrowing may sink you even further and may not be the right step for you. We’ll tell you that, too.

But that’s why we encourage business owners who think they need capital to start a conversation with us. We talk with business owners, get to know the business and do an analysis based on those and other factors. By the way, we provide business financing for businesses of all sizes and types in all 50 states. And while our average financing amounts typically hover around $250,000, we make loans of up to $2 million.

While this kind of business financing often makes the most sense for fueling business growth, some business owners still choose to pursue other options. Two intriguing ones:

(1) Lending to your business yourself, as the business owner; and

 

(2) Borrowing from family and friends.


Both offer some benefits, but both are loaded with potential pitfalls. Microsoft Business takes a look at lending to your own business, while Intuit Small Business delves into the pros and cons of borrowing from family and friends. While interesting to consider, many experts recommend keeping business and personal finances completely separate, as well as not potentially jeopardizing personal relationships with business matters—especially money. Lending/borrowing is never simple, which is why it pays to rely on the experts!
Image courtesy of Stuart Miles / FreeDigitalPhotos.net


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