Good Reasons to Borrow (and When to Wait)
A simple return test to tell whether financing will build your business or just postpone a problem.
Debt is a tool, like a ladder. Used well, it gets you somewhere you could not reach on your own. Used for the wrong job, it just puts you higher up when things wobble.
The question is not "can I get approved?" Approval is often the easy part. The better question is "will this money earn more than it costs, and can my cash flow carry the payments while it does?"
The return test
- 1
Estimate the gain
How much extra profit (not revenue) will this money produce, and over what time? Be specific: new orders, saved costs, higher capacity.
- 2
Find the total cost
Add up everything you will repay minus what you receive. See The True Cost of Financing.
- 3
Compare with a cushion
Look for profit comfortably above cost, not just barely. Many owners want a margin of safety because forecasts often run long and costs run high.
- 4
Check timing
Will the profit arrive before or while the payments are due? A good investment can still strain cash if payments start before the returns.
Owner story
Marcus kept turning down commercial service contracts because he did not have a third van and technician. He estimated a new van and tools would let him take on contracts worth about $9,000 a month in gross profit. Financing the van would cost about $900 a month. Even after hiring, the numbers left a healthy margin, so he moved ahead and started with two contracts he had already been offered.
Illustrative composite, not a real customer.
Productive uses vs plugging chronic losses
| Often a productive use | Often a warning sign |
|---|---|
| Inventory for orders or a proven busy season | Covering payroll every month because sales never catch up |
| Equipment that adds capacity or cuts costs | Paying off one advance with another |
| Marketing with a tested return | Funding a product that has not sold yet, at scale |
| Bridging a known gap until customers pay | Hoping a slow season fixes itself without changes |
Financing does not fix a margin problem
If the business loses money on each sale or every month, borrowed money makes the hole deeper and adds a payment. Start with Pricing for Profit and Cash Flow vs Profit before borrowing.
Myth or fact? Tap to flip
When it may be wise to wait
- The return depends on everything going right.
- You cannot name exactly what the money will do.
- Existing payments already strain your cash flow.
- A few months of better records or credit could unlock much cheaper options.
Quick check
Lena's bakery has lost money for six straight months. A provider offers $30,000 fast. What is the most sensible first step?
Words to know
- Return on investment (ROI)
- The profit a use of money produces compared with what it cost.
- Gross profit
- Revenue minus the direct cost of delivering the product or service.
- Margin of safety
- The cushion between your expected result and the point where a plan stops paying off.
Finished reading?
Track your progress through Stage 3: Fund.
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