The Business Owner’s Guide to Borrowing Well

Nearly every business owner I meet can tell me their revenue without looking it up. Ask about their loans and then there’s a pause. Facing debt carries a weight that other financial decisions don't, so many smart business owners prefer to avoid the topic altogether.

I understand the instinct, though avoiding the subject comes with a price. Debt management for entrepreneurs comes down to one distinction: some obligations move a company forward and some drain it, and both look nearly identical on a balance sheet. How you decide to borrow tells me a great deal more than the number itself.

Personal Debt and Business Debt Follow Different Rules

Each form of debt serves different purposes and deserves separate analysis. Money borrowed personally costs you every month and returns nothing beyond the asset attached to it. Money borrowed inside a company can generate a return greater than its cost, though it can just as easily do the opposite.

Owners get into trouble when they apply one philosophy across both. Someone who refuses all personal debt out of principle may pass on a business loan with a clear payback period. Another who is comfortable with aggressive borrowing at work may carry a revolving balance at home for years without noticing the cost.

The Real Cost of Carrying a Credit Card Balance

We advise paying the card in full every month, without exception. Rates on most cards run above 20 percent, and very few uses of capital return enough to justify carrying such a rate for long. The interest is only part of the cost. A revolving balance also drags on your credit profile, which is the same profile a bank reviews when you apply for a mortgage, an equipment loan, or a line of credit for the company.

I find it helpful to think of the card as a deferred payment tool rather than a borrowing tool. You are moving a purchase you already funded to the end of the month, collecting rewards along the way, and settling up. The moment a balance rolls forward, the card stops being a convenience and starts being one of the most expensive loans available to you. If your personal balance sheet has drifted, a periodic review of where your money is going usually surfaces the problem faster than a budget spreadsheet.

3 Factors in the Mortgage Payoff Decision

The decision usually comes down to your interest rate, the cash you have available, and how you feel about carrying debt. An owner holding a mortgage locked in years ago at a low rate has far less reason to retire it early than someone who borrowed at recent rates. Timing within the loan matters too, since the interest portion of a payment is heavier in the early years and much smaller near the end.

Liquidity is where I see the most avoidable mistakes. Business owners cannot run out of cash, and a paid-off house is a difficult place to retrieve money in a hurry. Writing a large check to eliminate a mortgage feels satisfying in the moment and can leave a company exposed weeks later.

Then there’s also temperament to consider, which spreadsheets handle poorly. Some owners sleep better with no debt at all, often because of something they lived through earlier in life. Their comfort is a legitimate input into the decision, and I have never thought less of a client for weighing it heavily.

When Borrowing Inside Your Business Makes Sense

Business debt can be useful when there’s a clear reason for taking it on and a realistic path to paying it back. Two uses come up often. Internal growth includes expansions, equipment, and build-outs a company could eventually fund from cash, but doing so might take several years. External growth includes acquiring another business.

For the bank, your financial statements are only part of the lending decision. They also want to understand where the business is headed, how you plan to use the borrowed money, and how the company will repay it. Owners who can make their case clearly may be in a stronger position when negotiating terms.

A line of credit is generally easier to establish when the business is performing well, rather than when you’re already short on cash. Because the rate usually floats, though, the cost of borrowing can change over time. Several owners over the last few years planned repayment around one number and then watched the cost of servicing the credit rise as interest rates increased. Borrowing also raises the stakes on risks already present in your business, since debt service continues whether or not the year goes as planned.

Where Debt Management for Entrepreneurs Fits in Your Broader Plan

Your personal and business debt affect each other in ways that are easy to overlook. What you owe personally affects how much you can pull from the company, what the company owes affects its value to a future buyer, and both affect how much risk your household can reasonably carry. This is why debt management for entrepreneurs works best when these decisions are considered together. A written financial plan lets you model these tradeoffs before you commit, and a sample plan shows how the cash flow projections come together.

Would you like a second set of eyes on the obligations sitting across your personal and business balance sheets? To get in touch, you can book a free introductory meeting online, call my office at 830-798-9400, or email solutions@rosamondfinancialgroup.com.  

Frequently Asked Questions

How much debt is too much for a small business?

There is no universal ratio, though a useful test is whether the company could cover its debt service through a slow quarter without touching reserves. If a modest dip in revenue makes payments uncomfortable, the load is too heavy for the current stage of the business. Running the numbers inside a full financial plan gives you a clearer read than any rule of thumb, and this sample plan shows the kind of cash flow modeling involved.

Does business debt affect what my company is worth when I sell it?

Yes. Buyers evaluate what they are assuming along with what they are acquiring, and outstanding obligations come directly out of proceeds at closing. Owners who reduce debt in the years before a transition usually walk away with more. The exit and succession process covers what to address and roughly when.

How do I balance paying down debt against other family financial demands?

Rank obligations by cost, starting with anything above roughly 8 percent, then fund near-term family needs before accelerating payments on low-rate debt. Owners supporting children and aging parents at the same time face the sharpest version of this problem, and managing money across generations walks through how to sequence competing priorities.

About Preston

Preston Rosamond is a wealth manager and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing solutions@rosamondfinancialgroup.com or https://app.greminders.com/c/prosamond.