Strategize your borrowings

Borrowings should be used to fund business growth and expansion of investments. These activities produce cashflow, which allows you to pay the principal and interest of the loans. Small businesses, however, often try to use loans as a means to fund current or past losses. While this is common, it just increases your debt without generating any additional cash to pay it off. That usually drives in bankruptcy.
Loans, if used for the right purposes, allow you to pursue opportunities available to your business now, rather than wait until you have build enough cash reserves to self-fund the growth, by which time they may have passed.
How much debt you need depends on the ability of your business to meet the repayments. For this purpose you must prepare a very realistic cashflow forecast. When setting the forecast, you don’t want all surplus cash going towards repaying the loan. Therefore, you need to factor in a comfortable margin and allow for any variability in your cashflow from month to month. You can improve your position by analyzing your cash cycle in order to make your cash work more efficiently, allowing you to repay your loan on time (or faster).
In good times, banks are happy to lend to businesses. However, just because a bank is willing to offer you a loan, does not mean that it is a wise decision to accept it. Your borrowing decisions must be based on your business plans, financials and cashflows. Not properly assessing the whole situation, can lead to financial troubles, including: Insufficient cash to meet the business needs, inability to reinvest in future expansion, reduced product or service quality (if you need to cut costs to repay loans), reduced value of the business, poor decision-making influenced by the debt position, increased management stress levels, business becoming insolvent.
Before you borrow, also evaluate whether your business will be able to meet the performance covenants that may be imposed by the bank. In a worst case scenario, banks can exercise control over the business through their security and the covenants they impose.
If your reliably prepared financial assessment indicates that you should not take on additional loan, don’t do it.
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