When it comes to funding growth, business owners usually fall into three money mindsets:
Debt is evil—never borrow.
Borrow all you can.
Borrow only when it makes sense.
This article explores the third mindset—how to decide when borrowing money is the smarter option, and when paying cash (bootstrapping) will protect your business.
How Lenders Decide Who Gets a Loan
Banks only loan money to companies they believe can repay them. That means:
No loans for startups without personal collateral.
No loans to companies without revenue or profit to demonstrate repayment ability.
Secured loans are possible for tangible assets, but loan-to-value rarely exceeds 70%.
Lines of credit may be available for established businesses with proven profitability, but small business owners are usually required to sign a personal guarantee.
In short, lenders minimize their risk. They’ll help you expand if you’ve already proven you can operate profitably.
Smart Times to Borrow Money
Borrowing money is not free—it requires repayment plus interest. But the right loan can help you seize an opportunity you couldn’t otherwise afford.
Example: Joe’s Plumbing
Joe earns $150,000 per year at his current branch. He sees an opportunity to open a second branch that could eventually generate the same profit.
Expansion requires $500,000 in equipment and startup costs.
Joe has $100,000 saved, but needs $400,000 more.
Option 1: Wait three years to save enough cash.
Option 2: Borrow $400,000 at 9.15% interest and repay $100,000 per year over five years.
Over a 10-year period, borrowing is the stronger financial choice. Inflation means the investment will cost more later, and Joe gains revenue sooner by opening the second branch right away.
When Debt Can Destroy Your Business
Borrowing is not always wise. Consider Frank the farmer:
Frank borrowed against his land to pay for seed, tilling, and irrigation.
A drought hit, leaving him unable to make loan payments.
The bank foreclosed, and Frank lost his farm.
This story highlights the danger of using core assets as collateral for speculative investments. One bad year can wipe out your business entirely.
Lesson: Only borrow when you have a recovery plan if things go wrong.
Why Borrowing to Pay Bills Is a Red Flag
Borrowing should primarily fund growth opportunities. If you’re borrowing money just to survive, your business model may be broken.
Healthy businesses usually generate 5–10% profit. If you’re losing money, banks will not (and should not) lend you money. Borrowing to cover payroll or expenses only digs a deeper hole.
Managing Cash Flow with Credit Lines
Sometimes borrowing is less about growth and more about timing.
For example, you might:
Pay employees and buy materials today.
Invoice the client after the project.
Wait 30 days (or longer) for payment.
During that gap, you are effectively lending money to your client. A line of credit or short-term loan can bridge the gap.
Still, frequent reliance on credit lines signals a problem with your payment terms. A better fix:
Negotiate client deposits or faster payment terms.
Build financing costs into your pricing if you’re consistently extending credit to customers.
Use credit lines as a safety net, not a routine practice.
Factoring and Accounts Receivable Financing
If customers are slow to pay, some businesses turn to factoring or A/R loans:
A bank may lend against your receivables.
A factoring company may buy them outright, paying you cash up front but taking up to 30% of their value.
While these methods can provide quick relief, they are expensive. Fixing your cash management systems is the more sustainable solution.
Final Thoughts
Debt is neither good nor bad—it’s a tool.
Borrow wisely for growth opportunities with a clear path to repayment.
Avoid borrowing for operating losses or speculative bets.
Fix your cash systems so short-term borrowing is the exception, not the rule.
When used strategically, borrowing can accelerate business growth. When misused, it can end your business entirely.
