The question isn't whether to borrow, but what this loan actually buys the business.
Borrowing to grow means using capital to buy an asset or a capability that generates more cash than the cost of capital: a production line, a new market, time for a new team to deliver results. This kind of loan has a payback point you can calculate.
Borrowing to survive means using capital to cover shortfalls caused by inefficient operations: too much inventory, slow collections, margins thinner than fixed costs. This kind of loan has no payback point; it only postpones the moment you have to face the problem.
How to tell the difference in three minutes
- If you don't take this loan, what happens in the next six months? The answer tells you whether it's a growth loan or a survival loan.
- Which cash flow will repay this loan, and does that cash flow already exist?
- Once it's repaid, what does the business have left besides having paid off the debt?
Debt doesn't make a business weaker. It only exposes existing weaknesses faster.