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Business Wisdom: When Borrowing is OK

Is it ever okay for your business to borrow money? Perhaps, but only under specific circumstances.

In this series, we’re examining the ways that God’s Master Plan for your money also applies to your business finances. Our last entry took a pretty hard stance on business debt: In general, debt is a bad strategy for businesses, just like it’s a bad strategy for individuals and families. That’s not to say that business owners should never borrow money, though. It only means that they need to be very careful about what they borrow for, and how they go about doing that.

In personal finance, we believe that home mortgages are the exception to the debt rule — it’s okay to borrow money to buy a home, as long as you do it wisely. In a similar way, long-term business purchases may warrant loans, but only if we do them in the right way.

When we deal with our own personal money, home mortgages are exceptions to the “debt is bad” rule for three reasons: Mortgage debt is secured by the value of your home; home values rise over time; and mortgages allow you to lock in your home’s price and interest rates. When we’re dealing with business finances, those same factors can make great guidelines. In general, businesses should only borrow money when the circumstances meet those same criteria: The loan is secured by collateral; that collateral is not declining in value; and that purchase represents long-term savings.

Every business is different, so it’s impossible to make hard-and fast rules about what is and isn’t a good purchase. The right decision for your business is going to depend on a host of factors, and just because it makes sense for one business owner to do something doesn’t mean it makes sense for the another business owner to do that same thing. We’re not here to give you specific instructions about what to buy and what not to buy. But the guidelines above can be pretty useful in determining whether a loan is the right move for your business.

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The most common case where borrowing makes sense for businesses is in buying real estate. Though many businesses can be run in a home or a small office suite, growing companies often require a large work space all their own. While renting this space is certainly a viable option, it can get expensive in the long run. If a company needs a piece of property from which to operate, then taking out a mortgage loan in order to buy a building or some real estate can be a good move. But it’s still important to make sure that you’re using wisdom in that mortgage — bring a large down payment, keep monthly payments low and make sure that your new building doesn’t become a burden.

There may be other similar cases where borrowing makes sense. Depending on your business, you may need to buy some very large piece of equipment, a patent, intellectual property or some other item of value. If you must borrow to do so, make sure that you’re not putting yourself in a position where you could end up underwater (owing more on the loan than the item is worth), and be certain that the purchase is going to add to your bottom line in the long run. After all, there’s no point in making payments for years on something that is not  making your business any more profitable.

In personal finance, the long-term goal is to pay off our mortgages and reach a place of wealth and stability that allows us to live debt-free for the rest of our lives. That should be the goal in business, too. Though there are some circumstances that merit loans, the idea is to pay those loans back as quickly as possible, and operate your business in such a way that you don’t have to borrow again to keep going. You may take out a mortgage to buy your first building. When you move up to your next one, though, is there a possibility that you could pay cash?

If you borrow in business, be sure that you’re using a lot of wisdom, and only borrowing to buy things that make sense. Then work hard to grow in such a way that you won’t have to borrow again.

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Photo by Elliot Brown. Used under Creative Commons License.

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