Chapter 7 — Borrowing to Grow

Chapter 7 — Borrowing to Grow

There is a right way and a wrong way to borrow money for a business, and the right way has a simple test: borrow for things that make money — do not borrow for hope. Borrowing $20,000 for a second work van when you already have more jobs than one van can handle pays for itself — the van generates revenue from day one. Borrowing $20,000 for a nicer storefront is borrowing for hope. Hope does not make loan payments.

When borrowing makes sense — and when it doesn’t

Borrow when you have proven demand and need capacity — equipment, inventory, a second location, staff — or to smooth out cash flow (buying $8,000 in parts this month, paid by customers next month). Do not borrow to cover ongoing losses — a loan just deepens the hole; to fund an untested idea — test with your own small money first (see Chapter 6); or when the payment depends on everything going right — ask: “Can I still make this payment if revenue is 30% lower?” And never borrow money to pay for borrowed money’s mistakes — a second loan to cover the first is how small problems become bankruptcies.

Bank loans and lines of credit

A term loan is the classic bank loan: a lump sum repaid in fixed monthly payments over 3–7 years. Typical 2026 terms: $25,000 to $250,000 at roughly 7%–12%. A $50,000 loan at 9% over 5 years costs about $1,038 a month — know that number cold, because it must fit your real cash flow. A line of credit works like a business credit card: the bank approves up to a limit (say $30,000), you draw when needed, and pay interest only on what you use. The catch: banks lend to businesses that look safe — 1–2 years of revenue, decent personal credit, often collateral. Brand-new businesses get turned away, which is why the SBA programs below exist.

SBA loans: the government’s helping hand, explained

The SBA (Small Business Administration) usually does not lend directly — it guarantees part of a loan made by a regular bank, repaying the bank a large share of the loss if you default. The 7(a) loan is the main program: the SBA guarantees up to 75–85%; amounts up to $5 million (most run $50,000 to $350,000); used for working capital, equipment, inventory, refinancing debt, or buying a business; terms up to 10 years for working capital, up to 25 for real estate; expect roughly 9%–12% in 2026. 504 loans cover real estate and heavy equipment: a bank covers ~50%, a nonprofit Certified Development Company covers up to 40% with SBA backing, you put down as little as 10%. Expect real paperwork plus a personal guarantee on most 7(a) loans; approval takes weeks to months — SBA loans are for planned growth, not emergencies.

Microloans: small money for very small businesses

Sometimes you need $8,000 for a used food cart, not $100,000. The SBA microloan program offers up to $50,000 (average around $13,000) through nonprofit community lenders — often more willing to work with first-time founders, immigrants, and underserved neighborhoods. Terms up to 6 years, rates typically 8%–13%. Your local SBDC (Small Business Development Center — free counseling in every state) can point you to microlenders nearby.

What lenders actually look at: the 5 C’s

Loan officers evaluate you on the 5 C’s: Character — do they trust you? On-time payments, no bankruptcies; for a new business, your personal history stands in. Capacity — can you afford the payment? It should fit comfortably, not barely. Capital — how much of your own money is in? 10%–20% is a common expectation. Collateral — what can the lender take if you do not pay? Equipment, inventory, the building, sometimes your house. Conditions — what is the money for, and what does the economy look like?

Your personal FICO is the first number most lenders check: 720+ is excellent, 670–719 is good, 620–669 is fair, below 620 is difficult — look at microloans. And cash flow is what actually kills borrowing businesses: after all expenses, does enough cash remain each month to cover the loan payment with room to spare? A business can be “profitable on paper” and still miss a payment because customers pay late. Track three months of actual cash in and cash out before borrowing — if the payment does not fit the real numbers, the loan does not fit.

How to prepare a simple loan package

You do not need a 60-page document: a one-page business summary (what it does, who pays, why it works); what the money is for — specific items with costs (“$18,000: two used delivery vans at $9,000 each”); financials — last 2–3 years of tax returns, a current profit-and-loss statement, a balance sheet if you have one; a 12-month cash flow projection (keep it realistic); a personal financial statement. Then talk to your SBDC before you apply — free counselors review loan packages every day.

Warnings: read this twice

Personal guarantees. Most small-business loans — including SBA loans — require one: if the business fails, the lender can come after your personal assets. An LLC protects you from business lawsuits, but a personal guarantee punches straight through that protection for the loan. Variable rates: a payment comfortable at 8% can become painful at 12% — make sure you can afford it at least 3–4 points higher than today’s rate. Borrowing against your home puts your house up as collateral — exhaust safer options first. Fees and fine print: origination fees (1%–5%), prepayment penalties, and required balances can add thousands — ask for the total cost in dollars, not just the rate.

Debt is a tool. Used for the right purpose, in the right amount, with eyes open about the risks, it builds businesses every day. Used carelessly, it turns a small problem into a personal financial crisis.

Key takeaways

• Borrow for things that make money (equipment, inventory, capacity for proven demand) — never to cover losses or fund untested ideas.
• Term loans give a lump sum with fixed payments; lines of credit let you draw as needed and suit uneven cash flow.
• The SBA guarantees loans (mainly the 7(a) program, up to $5M) so banks lend to businesses they’d otherwise reject; 504 loans cover real estate and heavy equipment.
• SBA microloans (up to $50,000, average ~$13,000) serve very small and first-time founders — ask your local SBDC for introductions.
• Lenders judge you on the 5 C’s plus your credit score and real cash flow; prepare a loan package and have an SBDC counselor review it before applying.
• Warnings: personal guarantees pierce your LLC protection, variable rates can rise, borrowing against your home puts your house at risk — read every line before signing.