5 questions to ask before borrowing money for your business

August 8, 2018

As you launch and grow your business it’s inevitable that you’ll need extra cash to deal with the unexpected. Choosing to borrow money often comes with a hefty dose of anxiety about quickly making the right decision. Don’t give in to that panic! Here are 5 questions to calmly ask yourself before borrowing money for your business:

1. Why do I need the money?

It’s important to take a breath and allow yourself a moment to clearly assess the situation. Just because something seems like a great opportunity doesn’t mean that it actually is. Alternatively, if you’re attempting to fix pre-existing financial problems, more debt might not be the right solution. The key is to take time to analyze the details surrounding your circumstances and consider all of your options. Securing a loan should support activities that aid in the long-term health of your company.

2. How much can I afford to safely borrow?

Let’s say you’re finally building out the backyard of your restaurant. You may have high hopes of recreating Tavern on the Green in your hometown, but your budget might only allow for simpler plans. Figure out your means by calculating your Debt Service Coverage Ratio (DSCR). Think of it as a way to measure “cash in” against “cash out.”

In a nutshell, you simply take your annual net operating income (EBITDA, or “earnings before interest, taxes, depreciation, and amortization”) and divide it by what your annual debt payments would be, including the loan in question.

DSCR = EBITDA ÷ Annual Debt Payments

A DSCR of 1 means that you’re breaking even and you might want to reconsider borrowing money. A DSCR of 1.5 means the business has 50% more incoming cash flow than needed to cover the payments of your debt, which could be a good sign.

3. When do I need the funds?

As with many things in life, when it comes to loans, timing is everything. Once you’ve confirmed that a loan is the right option, you’ll want to schedule the loan so the funds are deposited just ahead of when you plan to use the money. Consider the lead time required to complete the application process of whichever option you choose to pursue. Take advantage of any extra time you might have and apply for a bank loan. They’re generally cheaper, but the tradeoff is that the application process tends to be more involved. If you need funds right away, you could consider a term loan from an online lender. Again, proceed with caution. In many instances you’ll pay a higher rate to cover the risk as well as the convenience. If you’re looking for a clever alternative you might want to try Clover Capital, which could place cash into your account in as little as 3-5 business days.

4. Debt or equity, which is right for me?

When it comes to borrowing, it may seem that there are just as many options to finance your business as there are reasons to need the funds. If the funds you plan to borrow are intended to capitalize on new opportunities available to your business, then you may want to consider equity financing. This is where you sell shares to investors who also see the level of potential for your business. While working with investors may expand your support system to include seasoned professionals, you also open yourself up to paying those investors in perpetuity. With traditional loans, once your obligation has been fulfilled, all remaining profit is yours.

5. How easy is the process from start to finish?

The administrative tasks associated with loans can be overwhelming to the unsuspecting borrower. For example, there’s the extensive list of documents a lender may require as part of your application package. Be ready to supply as many as 20 items supporting your case. A way around this is to explore options offered by companies with which you already have a relationship. Much of your info is already on file. Work with your account manager to help guide you through the rest of the requirements.

Once you’ve been approved for the loan, how easy is it to incorporate the payments into your monthly accounting? The great thing about Clover Capital is that a small percentage of your daily credit card sales are automatically withheld to repay your cash advance. It truly is a “set it and forget it” solution. Plus, once approved, you have the opportunity to renew your cash advance for additional funds.

Remember, don’t let the pressures associated with your reasons for borrowing money cloud your thinking and impair your judgement. Take an honest look at your circumstances and focus on making the most responsible decision for your business.

Clover is sold by leading U.S. banks including Bank of America, BBVA, Citi, PNC, SunTrust and Wells Fargo. You’ll also find Clover at our trusted partners including CardConnect, Restaurant Depot, and Sam’s Club. For more information, visit us at