Borrowing money

Many banks and finance companies offer small businesses a suite of loans and other types of financing. Before taking on debt, think about the impact on your business — positive and negative.

Is borrowing right for you?

If you decide to approach banks or finance companies for money, make sure you can make a good case for the loan and you can pay it back on time.

Many small business owners have borrowed money at one time.

In general, a loan can be a good option if you:

  • will use the money to grow or cover a short-term cash shortfall, rather than as a bailout
  • can make repayments on time, every time
  • can pay it off early – but only if this will save you money, eg compare reduced interest vs early repayment fee
  • understand  the loan’s terms and conditions.
Case study

Case study

Buy what you can afford

When it comes to capital, Vicki Ha, owner of Wellington’s House of Dumplings, believes in only spending what she has. “I still haven’t borrowed one cent from the bank and there’s not a lot of businesses like that,” she says. Ha thinks bank loans aren’t a safe business practice because she can’t prove how much income she’ll make.

“My approach is that you can’t predict sales,” she says. “That’s the problem with a lot of businesses. They go to the bank to borrow $40–50k based on their own predictions. But who decides that? It’s not the owner — it’s the customers.”

Ha avoids borrowing by only buying what she can afford and avoiding frivolous or spur-of-the-moment business purchases.

“When I started, I had $20,000 in my bank but I would only spend it very wisely. I’m still very cautious about spending money.”

While Ha consciously decides not to take on debt, loans can be a viable option for those who carefully assess whether borrowed money can be paid back on time and put to good use.

Questions to ask yourself

When you're deciding whether to borrow money or not, consider these questions:

  • Why do I need the money? The purchases you make should give you a good return, eg an asset essential for growth.
  • How can I cut costs? If you can trim your spending, you might not need to borrow as much money as you think — if at all.
  • Can I afford the repayments, even during slow months and at tax time? Be confident you can on time, every time. Banks and other lenders usually charge extra for late or missed payments. Prepare a cash flow forecast and, if you’ve been in business for long enough, review your financial records for the past two years.
  • How much interest will I pay? If you can afford it, opt for a shorter term and/or higher repayments to keep interest charges down. Use an online tool to model repayments for different terms and interest rates — try the debt calculator(external link) on the Sorted website. Then factor loan repayments into your cash flow forecast. Is it worth taking on debt?
  • What loans am I eligible for? Borrowing options are very different for new businesses vs existing businesses.

An accountant or bookkeeper can help you decide if a loan is a good idea or not.

Tips on choosing types of funding

Be wary of offers of fast or unsecured financing.

Be wary of offers of fast or unsecured financing.

These loans could be easier to get, but tend to come with higher interest rates.

Pitching for a loan

Securing a loan involves more than just walking into a bank and asking.

In order to get the best deal, shop around and be prepared. Do your research into loan types, different lenders and your own financial position.

Just like investors, banks will want to see that your business is viable. You will be asked to prove you can pay back the loan and the interest.

When you approach a bank for a business loan, be sure to bring your:

If you’re new to business and don’t have financial data to back up your application, lending options are more limited. You might have to take out a personal loan or borrow more on your mortgage.

How to create a business plan

Introduction to business finance

If you can afford it, consider bootstrapping when starting up.

If you can afford it, consider bootstrapping when starting up.

This means using your own money and not taking on any debts. But it’s not suitable for all businesses — see Choosing the right types of funding for more on bootstrapping.

Banks are more likely to offer better deals and lower interest rates to people they know and trust. Establishing a good relationship with your bank pays off.

Even if you don’t currently need to borrow money, start building a good rapport with someone at your bank now. This might be the branch manager or a specialist advisor.

A number of banks offer extra support for those running a business, eg tailored banking services and ways to connect to potential investors.

Common mistakes

Common mistakes
  • Borrowing money without forecasting your income, or a forecast which over-estimates your future earnings. It’s better to understate earnings and overstate costs.
  • Not understanding the terms and conditions of your loan, or the interest rate you’ve agreed to pay.
  • Getting a loan and spending up large — it might feel like easy money, but have a plan for what to spend it on.
  • Not having a plan in place to pay back your loan — it’s important to budget for regular repayments.
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