When to borrow to grow your business - Mark MacLeod

September 11, 2023 - Mark MacLeod

When to borrow to grow your business

I am often asked about when or if a company should take on debt to help grow their business.

Here are my thoughts:

Sources of Capital

There are three source of capital to grow your business:

Revenue – well, actually, profit (revenue less expenses).

Equity – selling shares in your company

Debt – borrowing money that will have to be repaid

Cost of Capital

Profit, or cash flow from operations, is the best source of financing there is. It’s repeatable and free.

But often it is not enough. Also, for tech companies, it is often years in the future.

Equity is the most expensive form of financing. You are giving up a piece of your business.

Venture capital looks to generate at least a 35% return per year. That is expensive!

From a pure cost perspective, debt is almost always cheaper than equity. You don’t give up any ownership in your company (unless the lender asks for warrants. These are like stock options).

Managing Risk

The downside with debt is that you have to pay it back.

When it comes time to sell your business, lenders get paid before shareholders.

So, there is risk to borrowing to grow your business.

This means that you need to know when is the right time to take that risk.

Most VC-backed companies are burning money. So the money needed to repay the debt must come from money raised by selling shares.

Your business can’t actually afford to repay the loan until it is profitable.

When is the right time to add debt then?

In simple terms it is when your business is de-risked. Unpacking this:

You are post-product market fit

You have proven, repeatable channels to find customers

You know your unit economics. You know how much a customer is worth. You know how much to pay for a customer

The goto market aspect of your business is a proven formula.

When you have achieved this milestone, debt is a great way to keep repeating that formula.

This helps you grow faster than you would without the debt.

This means you are using a lower cost source of funding for a low-risk use. This is the way to do it. Keep equity for higher risk items like developing new products.

I hope this simple framework helps you think about when to borrow to grow your business.

Photo by Andre Taissin on Unsplash

Your journey is never done

Sign up to my newsletter and join an inspired community of leaders who realize that the journey to achieving their full potential is never done.

    If you’re curious about my coaching and deal work you can learn more here.

    back to blog

    Latest Blog Feed

    Execution Over Ideas: Mark Ang’s Philosophy of Startup Success

    Check out my discussion with Mark Ang on The Startup CEO Show. This young entrepreneur built GoBolt as a side hustle in college. It is now is a significant enterprise that earned him a spot on the Forbes 30 under […]

    read more

    Building Trust and Embracing Change with Jordan Boesch

    Take a look at the transcript from my conversation with Jordan Boesch on The Startup CEO Show, who has scaled 7shifts from a nascent startup to a powerhouse with over 400 employees. Uncover Insights from This Episode Mark MacLeod:In this […]

    read more

    Optimizing Your Recruitment Funnel: A Strategic Guide for CEOs

    Everything comes down to people. Every issue. Every opportunity. Unless you have a factory producing widgets, your people are your company. Your company is only as strong as your people. Building the strongest team that you can is one of […]

    read more

    Contact

    Email : me@markmacleod.me

    Follow me:

    Mark MacLeod ICF Member

    Send Me A Message