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What a Small Business Should Know About Borrowing Money

Borrowing Money In Small Business

Business is in a downmode. Cash is short and your days of debt in accounts receivable are getting longer. You have no more or your own cash to put into the business. You don't really see any way out. Not only is your long term debt a problem, you can hardly deal with short term expenses. What do you do?

"Borrow to stay alive?", you ask yourself...do I need an investor or should I leverage my personal assets with the bank?

Let's say that you seek and obtain an investor. Your problems are solved, (so you think). You now have the cash to pay those bills, do some capital repairs and have a comfortable cash balance in the bank.

But, have you solved your problems? A few months later you find yourself in the same cash short position. You are no better off and now you have an investor who owns part of "you" from either a debt or equity position. The investor is licking his chops because while you were "obtaining" him he was taking you over and he knew that you would be back to him in need of more cash. You were on a roll and he saw it coming. Meanwhile, your so busy trying to keep the business afloat, you fail to see what is happening. In the background the investor has his own players ready to take over your business. And on and on...

On the other hand, in dealing with a bank, you are happy that they have "given" you a loan. (Repeat the same senario as above, with modifications and adjustments and you are left in the same position)

I know that these situations are extreme but the point is that when you borrow...realize some of the implications. Borrowing comes at a cost and can result in fatality for you and your business. For one thing, borrowing can keep you in long term debt for many years to come.

In general, don't borrow to pay off short term debt. If you don't have the cash to pay current bills, you have serious problems that need to be carefully reviewed. Start by generating more sales rather than putting yourself further in debt. A quick fix, via borrowing, will, almost always, come back to haunt you.

Use borrowing for capital improvements or long term debt. Don't be proud of the fact that you are the "leverage king" on the block.

We all need to borrow at various points in time. It is our way of life. But borrow for the right reasons. Ask yourself the question...is the benefit of borrowing this money outweighing the cost?

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