Each of us borrows money. How much, from whom, and for what purpose, are all important questions.
Do you own a home? Did you take out a mortgage to do it? If yes, you borrowed money to accomplish the purchase. You are probably paying it back over a time frame consistent with the ownership rewards.
Same with an auto. Did you finance or lease it? If yes, you borrowed money for it. The repayment is over a much shorter period of time.
What about your credit cards? They are a form of borrowing, and hopefully the repayment is very fast. You don’t want to be paying for your groceries over ten years!
The same principals hold true if you own (or want to own) your own business. Your business is the goose that lays the golden eggs. Treat it properly. Debt can help.
The lender can be a bank, finance company, or a wealthy friend or relative. Understand the purpose and the repayment. And definitely understand what the lender expects in return!
When you purchase from vendors on open terms, that is also a form of borrowing.
You need working capital to operate. Quite simply, working capital is your cash, accounts receivable and inventory minus your trade payables and other current maturing obligations. You need positive working capital to manage your affairs.
You would borrow short term to help grow your business. If you borrow it, although your working capital does not increase, your liquidity does. You have more flexibility. Maybe carrying some larger sales, inventory and other uses. But you need to understand the cash flow cycle to make sure you can repay what you borrow.
It is important to keep your trade vendors paid timely. They represent one of the easiest sources of debt, but it can dry up quickly if not managed. Borrowing to reconcile a time delay is a common use of short term loans.
Maybe you can grow your business by purchasing some manufacturing equipment. Prepare a business plan, then borrow to accomplish your goals. Tie the repayment to the profits from the new plan.
You may have heard the term “leverage.” You can utilize your capital by leveraging it in multiples for good, sound growth.
Now if your working capital is not sufficient to operate your business on a daily basis, then borrowing short term debt is not the answer. You should be (financially) afraid.
You would undercapitalized. Causes can be, among other things, not enough capital at inception, operating losses, or mismatched repayments.
As they say in the military, do not out run your supply lines. The same holds true with capital.
Please search some of my previous articles on business plans and how to finance your business.
A 1975 graduate of the Wharton School at the University of Pennsylvania, Harvey enjoyed a 20+ year career in commercial banking, exercising his “golden parachute” in 1996. In his volunteer life, he is a past chair of the Small Business Banking Unit of the American Bankers Association, Easter Seal Society of New Jersey, the SAAGNY Foundation, PPAF EXPO, and Supplier Committee of PPAI. He is also a past President of PPAF. PPAI awarded him the H. Ted Olson Humanitarian Award in 2013.