Ask any small business owner if you should borrow to expand faster, and you will get a very passionate response. Some will warn you of the dangers of borrowing against your business, others will tell you it’s the only way. Ultimately, borrowing is an effective way to raise capital to expand without giving up equity, however, it can come at a steep cost, specifically to cash flow. Below are some pros and cons of borrowing money as a small business owner. Hopefully, they will help you determine what is best for you.
- Allow for Early Expansion – You can generally secure financing to allow you to expand well before you can save those funds.
- Helpful During Slow Seasons – Lines of credit and other revolving credit allow seasonal businesses to stay open during slower seasons, which can be extremely helpful, especially early on.
- Startup Funds – Some businesses require a large sum of cash to get going; lending can provide that cash if you don’t have a large savings account.
- Inventory – Lending can make it easier to buy inventory. With a greater selection often comes greater sales.
- Cash Flow Management – Many small businesses have trouble managing day-to-day and month-to-month expenses. Credit can help cover gaps in payments.
- Expensive – Loans and lines of credit accrue interest. That interest builds up quickly if not paid down. This interest can put small businesses out of business if allowed to grow unchecked.
- Over Expanding – Some businesses will over expand or expand too quickly, and the owner will not be able to manage the new responsibilities. Others will not be able to keep up with the new demand. Expanding is good, but too much growth can actually be bad.
- Kills Cash Flow – Nothing will shut a business down faster than a lack of cash flow. If you are spending the majority of your cash on paying down debts, you will have nothing left to cover other bills, advertise, or take advantage of strategic opportunities.
- Becomes a Crutch – Lending can become a crutch. It can allow you to spend money you don’t have, expecting to pay it down later. If you need loans to cover your expenses month over month, your business may not actually be successful and can lead to serious personal consequences when it crashes down.
Whatever your need, lending can be a blessing and a curse. If you decide to borrow to build your business, do so with a mindful eye toward managing cash flow and ensuring you have a strategy to eliminate the debt as quickly as possible.…