Debt is the most expensive way to grow a small business when it works and the fastest way to lose one when it does not. The decision is rarely about the interest rate. It is about whether you can carry the payment in the worst month you can realistically imagine.
The two questions to answer before borrowing
- Does the thing this loan buys pay for itself, with margin, inside the loan term?
- If revenue drops 30 percent for two quarters, can I still make the payment without cutting people?
If either answer is no, the loan is not financing growth. It is financing risk.
The loan structures to avoid
- Merchant cash advances. Daily or weekly debits, effective rates north of 60 percent, and a clause that lets the lender take more in a bad month. Almost every operator who took one regrets it.
- Confessions of judgment. You sign away your right to defend yourself in court. Walk away from any contract with this clause.
- Stacked short term loans. Three small lenders all debiting your account weekly will finish what the slow month started.
What good debt looks like
An SBA loan for an asset that produces revenue. A line of credit you draw on for a real seasonal gap. Equipment financing where the equipment is the collateral and the rate is fixed. A local bank relationship that costs slightly more and treats you like a person.
The conversation with the lender
Bring a one page summary of your business, the use of funds, the repayment plan, and your worst case. Lenders trust operators who have thought about the bad version, not the ones who only talk about the good one.
Work the specific offer on your desk through raising capital. If the underlying issue is a cash crunch and not growth, go through managing cash flow first.