Faye McDonough

Debt can be a significant part of running a commercial business, but I still see so much confusion about raising finance.

That can mean requests for debt funding with no clear plan on how it will be repaid and no defined purpose.

I’m not judging business leaders’ financial knowledge. I’ve seen this just as often from accountant-prepared proposals, especially when working for niche lenders where we were perceived to ‘take more risk’.

That was true – but never without a plan or a purpose.

The Foundation of Smart Borrowing

Working in lending has given me insight into what separates successful borrowing from financial mistakes. The businesses that thrive with debt understand that borrowing isn’t just about accessing cash – it’s about strategic investment in growth or operational improvement.

The confusion I see most often comes from treating debt as a generic solution rather than a specific tool for achieving particular business outcomes.

Before You Approach a Lender

Before presenting your request to a lender, consider whether the loan is:

1. Purposeful

Ideally, borrowing should drive revenue or improve operations. The best applications I reviewed had crystal-clear connections between the borrowed funds and specific business improvements.

This isn’t about having a fancy business plan – it’s about being able to articulate exactly how the money will be used and why that use will benefit the business.

Ask yourself: Can I explain in simple terms how this money will improve my business’s position?

2. Affordable

Can the business afford the repayments without compromising operations?

This goes beyond whether you can technically make the payments. Affordable debt leaves enough breathing room for unexpected challenges while still allowing normal business operations to continue smoothly.

Ask yourself: If revenue dipped by 20% for a few months, could I still make these payments without cutting essential services or staff?

Warning Signs to Watch For

To identify potential problems before they become serious, ask yourself these questions:

1. Am I borrowing to cover operational expenses?

This is often a red flag that suggests deeper cash flow issues rather than growth opportunities. While there are legitimate reasons for short-term operational funding, it’s crucial to understand why operational expenses aren’t being covered by revenue.

2. Are these high-interest loans?

If so, is the return to the company higher than the interest you’ll pay? High-interest borrowing can make sense if it unlocks proportionally higher returns, but the maths needs to work clearly in your favour.

3. Will I have to pay back multiple loans?

Consider the impact on cash flow. Have you mapped out what managing multiple repayment schedules will look like month by month? Multiple loans can quickly become overwhelming if not carefully planned.

4. Am I feeling pressured to decide quickly?

Lenders who rush you rarely have your best interests at heart. Legitimate lending decisions allow time for proper due diligence on both sides.

If you answer yes to any of these questions, I’d recommend pausing and seeking advice from a trusted financial advisor or mentor.

Lessons from Lending

A few extra thoughts learned from experience:

Timing Matters

I’ve seen businesses rush into debt because they think an opportunity will vanish. It rarely does, and rushed decisions often mean missed red flags.

Good opportunities usually allow time for proper consideration. If someone is pressuring you to “decide now or lose out,” that pressure itself is worth examining.

Your reflection: What’s driving the urgency around this borrowing decision?

Simplicity Wins

The best applications I saw weren’t the fanciest – they were the ones where the business owner could walk me through their plan in plain English.

If you can’t explain your borrowing plan simply, you might need to rethink it. Complexity often masks uncertainty or poor planning.

Your reflection: Can you explain your borrowing plan to a friend who doesn’t work in your industry?

Start Small When Possible

Testing your lending relationship with a smaller facility often works better than diving in deep. It builds credit history, establishes trust, and lets you prove your business case without taking on unnecessary risk.

Small successful borrowing experiences create a foundation for larger facilities when genuinely needed.

Your reflection: Could you achieve your goals with a smaller amount initially?

What Healthy Debt Looks Like in Practice

From my lending experience, healthy business debt typically has these characteristics:

Clear purpose: You can explain exactly what the money will achieve

Realistic repayment: Payments fit comfortably within projected cash flow

Strategic timing: The borrowing aligns with business cycles and opportunities

Appropriate terms: Interest rates and conditions match the risk and purpose

Exit strategy: You know how and when you’ll be debt-free again

Questions for Your Own Borrowing Decisions

Before approaching any lender:

• What specific business outcome will this borrowing achieve?
• How will I measure success in using these funds?
• What does my repayment capacity look like in different scenarios?
• Why is now the right time for this borrowing?
• What alternatives have I considered?

Moving Forward Thoughtfully

Smart borrowing isn’t about avoiding debt entirely – it’s about using debt strategically to strengthen your business rather than simply keeping it afloat.

The most successful business owners I’ve worked with treat borrowing decisions with the same careful consideration they’d give to hiring key staff or choosing major suppliers. It’s a significant business decision that deserves proper planning and realistic assessment.

What does healthy debt mean to you? I’d love to hear about your experiences with business borrowing – both the successes and the lessons learned.

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Photo by Caju Gomes on Unsplash under ‘healthy’. This may be how big my smile is when a beautifully put-together lending proposal lands on my desk!