Should Your Business Take Out a Loan? A Guide to Borrowing Strategically

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Don’t wait until cash is tight to think about a loan. Here’s how smart business owners borrow to fuel growth.

The Pitfall of Borrowing in a Pinch

Picture this: You’re juggling payroll, vendor invoices are piling up, and your cash flow is stretched thin. This is not the time to rush into a loan. Savvy business owners borrow from a position of strength—when they’re planning for growth, not scrambling to survive. Here’s how to decide if a loan is right for your business and how to borrow wisely.

The 5W Framework for Smart Borrowing

Who Should Consider a Loan?

• Established businesses poised for expansion, such as hiring staff, opening new locations, or upgrading equipment.

• Companies with steady revenue and a clear plan for using loan funds to drive growth.

• Entrepreneurs looking to purchase real estate for operational stability or investment.

What Types of Loans Are Available?

• Term Loans: Ideal for long-term investments like equipment or large projects.

• Equipment Financing: Tailored for purchasing assets like machinery or vehicles.

• Commercial Real Estate Loans: For buying or refinancing commercial real estate.

• Lines of Credit (LOCs): Flexible funds for short-term working capital or seasonal expenses.

• SBA Loans: Government-backed with favorable rates but strict eligibility and paperwork requirements.

• Invoice Financing: Advances cash against unpaid invoices, perfect for businesses with long payment cycles.

When Is the Right Time to Borrow?

• Growth Phase: Secure financing before launching major projects or signing big contracts.

• Stable Cash Flow: Lenders favor businesses with consistent revenue, not those in distress.

• Strategic Opportunities: Borrow when your business is healthy to fund expansions, tech upgrades, or inventory.

• Favorable Economic Conditions: Monitor interest rates and economic trends.

Why Borrow?

Loans should power growth—think new locations, upgraded systems, or inventory for peak seasons—not cover ongoing losses. Borrowing to plug operational gaps often masks deeper issues. Fix inefficiencies first, then consider debt for strategic moves.

Why Not Borrow?

Avoid loans if:

• Your business has declining sales or unresolved cash flow problems.

• You lack a clear repayment plan.

• High interest rates or poor credit lead to unfavorable terms.

Instead, explore alternatives like cutting costs, seeking equity investors, or optimizing operations.

How to Prepare for a Loan

1. Create a 1-Page Business Plan

Lenders want to see how the loan ties directly to revenue.

2. Clean Up Your Financials

Have three years of statements, your latest interim reports, and cash flow projections ready.

3. Know Your Numbers

DSCR (Debt Service Coverage Ratio) should be 1.25x or better.

4. Understand Collateral & Guarantees

Some loans may require personal assets. Know what you’re signing up for.

5. Be SBA-Ready (If Applicable)

These loans are powerful but require precision. Lexicon’s lending team can walk you through it.

How Much Should You Borrow?

Borrow only what your business can repay, even if sales dip or costs rise. A simple rule: Aim for a debt service coverage ratio (DSCR) of at least 1.25, meaning your annual net operating income (also known as earnings before interest, taxes, depreciation, and amortization or EBITDA) is 1.25 times your loan payments. Run scenarios to test slower sales or delayed returns on investment. For example, if your cash flow is approximately $2,500.00 per month, your loan payment should be at or below $2,000.00.

Real-World Examples

• The Retail Turnaround: A local retailer borrowed via a line of credit to stock up for the holiday season, boosting sales and repaying the loan quickly.

• The Property Play: A business owner paying rent used a commercial real estate loan to buy their facility, stabilizing costs and building equity.

• The Non-Profit Win: A CEO purchased their organization’s building with an SBA loan, later selling it for a profit to fund future programs.

Risks to Watch

• Over-Leveraging: Too much debt can strain cash flow, especially if sales slow.

• Variable Rates: Rising interest rates can increase payments on adjustable-rate loans.

• Economic Shifts: Plan for downturns that could impact revenue or loan terms.

Partner with Lexicon Bank

Lexicon Bank’s relationship managers don’t just walk you through the lending process—they help you decide if borrowing is the right move. Our team guides you through loan options, SBA applications, and financial planning to ensure you’re ready for growth.

Ready to explore a loan? Contact Lexicon Bank for a complimentary financial review or schedule an appointment. Borrow smart, grow strong.

Schedule An Appointment

The Business Loan Affordability Calculator is provided for informational and illustrative purposes only. The results presented are estimates based on the data you input and do not constitute a loan approval, prequalification, or commitment to lend. Actual loan terms and approval are subject to full underwriting, credit evaluation, and verification of financial documentation. Every borrower’s financial situation is unique, and additional factors may impact loan eligibility and terms. Lexicon Bank does not guarantee the calculator’s accuracy or suitability for your actual borrowing situation, and the information provided should not be relied on as financial condition or advice. We strongly recommend consulting with a Lexicon Bank representative or a qualified financial advisor to discuss your specific needs and circumstances.