Running a business on borrowed money looks simple: you borrow, bridge a gap, grow and repay with interest. In practice, a loan often becomes a recurring payment with a life of its own, demanding attention every week.
To decide whether borrowing makes sense for your business, it helps to distinguish two scenarios. The first is bridging a cash flow gap, when money is due to the business but will arrive later. The second is funding growth: tools, people and working capital for a larger workload. The article “How to avoid a cash flow gap” explains how these gaps work.
Let us compare the benefits and drawbacks of borrowing. At the end, you will find a conclusion and a short check on whether a loan suits your business.
Contents:
What does running a business on borrowed money mean?
Business owners often borrow to make settlements more predictable. This need can arise even without investment plans. Materials have already been purchased, tradespeople need to be paid, a contractor is waiting for payment and the customer will transfer the money later. The report shows a profit, but the bank account is empty. The difference between earning money and receiving it is explained in “What is revenue, and when is money considered earned?”.
The second reason is growth. A loan provides working capital so you can take on more projects without extending deadlines or losing quality. It is important to understand in advance where repayment will come from: project margins, the company’s regular revenue or future payments under contracts.
The third scenario is patching up the system: prices are too low, expense tracking is in disarray and money from different projects is mixed together. A loan then conceals the problem and postpones the reckoning. The article on management accounting mistakes (in Russian) makes this very point: borrowing becomes the last option when payment arrangements have failed and the real cash position is unclear.
Benefits of business borrowing
1) Speed when you need it. A loan gives you access to money here and now. Compare the substantiated benefit of avoiding a delay with all mandatory costs under the selected agreement over a comparable period. Check your ability to make repayments separately against a cash flow schedule. The situation is familiar: a supplier holds a discount for two days, the crew is idle and contractual deadlines are pressing. A loan helps maintain momentum and avoid paying the price in penalties, rework and reputation.
2) Taking on more projects without running short of cash. In a project business, growth often runs up against working capital limits: the customer’s advance has arrived, purchases and wages have consumed it, the next project is approaching and there is no money to get started. A working capital loan allows you to increase your workload. It then comes down to unit economics: contribution margin and the margin ratio must be sufficient to absorb the cost of borrowing. If the terms are confusing, read the explanation of contribution margin and the approach to calculating net profit in “How to calculate net profit”.
3) Protecting relationships with people and counterparties. When contractors and employees are paid on schedule, it is easier for the business to negotiate prices, deadlines and additional work. Here, a loan acts as a buffer. It reduces the likelihood of cash problems derailing one project and triggering a chain of failures across the others.
4) Clear planning. Repayment amounts and dates are determined by the agreement. If the rate is variable, test a scenario in which it changes. If the business tracks cash flow and compares planned with actual results, reconcile these with the contractual schedule: a project’s plan-versus-actual comparison does not replace a debt servicing schedule. The 101 blog offers a useful pair of resources: the cash flow statement and an article on tracking expenses (in Russian).
5) A tool for investment when the payback period is shorter than the loan term. This is an uncommon but powerful scenario: equipment that reduces costs, hiring someone who consistently brings in deals or entering a segment with a different margin. It is important to calculate payback honestly and look at the business’s operating profitability. The article on operating profit margin provides useful guidance.
To test the calculations against your own projects, it helps to keep separate records for each site: how much money came in, how much went out, the outstanding debt and the profit. In the 101 app (in Russian), data from projects and the Company Fund helps you compare recorded receipts, expenses and settlements; supplement your forecast of the ability to meet payments with the contractual schedule and expected cash receipts.
Drawbacks and risks
1) Borrowing costs eat into margins. Interest and fees specified in the agreement increase borrowing costs; track their amounts and dates separately. If margins are low, a loan can easily turn a profitable project into a break-even job. Remember the difference between markup and margin: a markup may look healthy while the margin remains modest. See the article on contribution margin and profitability for an explanation.
2) The risk of a new cash flow gap. The paradox of borrowing is that a loan is often taken out because of a cash flow gap, yet the recurring repayment can itself cause another gap if receipts are irregular. The business needs a liquidity reserve; otherwise, the loan adds stress and penalties. Again, the causes of cash flow gaps and ways to prevent them are covered in this 101 article.
3) Collateral, guarantees and restrictions. The agreement may include security, personal guarantees and requirements relating to turnover and reporting. Even when the company needs the money, the owner’s personal risks depend on the specific terms and applicable rules; check them before signing.
4) The temptation to cover systemic mistakes with borrowing. Underpricing, chaotic expenses, unrecorded accountable funds and overdue receivables can all create the feeling that you just need a little more money. A loan gets you through to the next payment, and the cycle repeats. Mixing project money with personal money is another part of this problem. It becomes difficult to see where the business earns money and where it consumes working capital.
5) Accounting becomes more complicated. You now have interest, fees, principal and early repayments to track. If records consist of chats and notes, errors accumulate. At least basic discipline will help: a cash flow statement, accountable funds tracking and separate project records. There is a dedicated article on accountable funds in construction in the 101 blog (in Russian).
Conclusion: should you run a business on borrowed money?
Borrowing makes sense when the loan addresses a specific need and there is a clear source of repayment. In these cases, it becomes part of the financial model: money is borrowed for a defined period and a defined volume of work, with a clear cash buffer.
Postpone borrowing when it is needed to cover a persistent shortage of money. First, put pricing, expenses, accountable funds, payment schedules and cash control in order. A useful habit at this stage is to reconcile three reports regularly: profit and loss, cash flow and the balance sheet. The 101 blog article on the three essential reports for business owners provides a helpful framework.
To check your decision quickly, assess the loan using the questions below. Write down numerical answers rather than relying on how things feel.
- What is the purpose of the loan: bridging a cash flow gap, working capital for a new project or an investment in reducing costs?
- Which cash receipts, and on which dates, will cover the full payment—principal, interest and mandatory payments—after current expenses?
- Is the margin sufficient to cover all mandatory costs under the agreement without losing profitability?
- What reserve is needed if expected receipts are delayed, and which payments will it cover?
- What will be pledged as collateral, and who bears the personal risk?
- How will the loan be recorded: principal, interest, fees and early repayments?
To assess which data from your projects could help you evaluate a loan, prepare the contractual schedule and details of receipts and payments. In the 101 app, you can compare data from projects and the Company Fund. Agree in advance on how the loan amount, principal, interest and payments will be recorded: ordinary events do not create a separate loan repayment schedule. You can discuss these questions using your own figures at a demonstration and presentation of the 101 app.
