When should a business borrow money? Seven tests

Some owners won’t borrow a dollar on principle. Others borrow for everything. Neither is a strategy. Debt is a tool, and like any tool it’s excellent for some jobs and dangerous for others. The question isn’t “should businesses borrow?” but “should this business borrow for this purpose, now?”

These seven tests will tell you.

Test 1: Can you name the purpose — precisely?

“Working capital” is a category, not a purpose. Good borrowing has a specific job:

• buy a second excavator to take on the council contract;
• fund stock for the pre-Christmas peak;
• cover the 60-day gap on a new supply agreement;
• buy out a retiring partner;
• pay the ATO on time and avoid non-deductible interest;
• fit out a second location.

If you can’t name the purpose in one sentence, you’re not ready to borrow.

It’s also worth thinking about timing within the year. Applying when your recent bank statements reflect a busy, healthy period generally puts you in a stronger position than applying at the bottom of your quiet season. Your weekly money routine will show you when that window is, and lets you arrange a facility calmly instead of under pressure. Many owners find that the best time to put funding in place is several weeks before the forecast says they’ll need it.

Test 2: Does the purpose pay back more than it costs?

Compare two numbers in dollars:

• the benefit — extra gross profit, costs saved, or penalties avoided over the term;
• the total cost of finance — every fee and charge over the life of the facility.

Illustrative example. A joinery business buys a CNC machine that lets it take on work it currently turns away, adding an estimated $70,000 of gross profit a year. If the total cost of finance over four years is well below the extra gross profit the machine generates in that time, the purchase pays for itself with room to spare. If the numbers are close, the decision deserves a harder look. (All figures illustrative.)

Test 3: Does the term match what it funds?

A classic mistake is funding a long-life asset with short-term money, or the reverse.

Purpose	Life of the benefit	Suitable structure
Vehicles, machinery, fit-outs	Several years	Term finance over a matching period
Stock for a peak season	Weeks to months	Line of credit or short-term facility
Debtor gap on a big contract	Ongoing while the contract runs	Revolving working-capital facility
Business purchase, partner buyout	Many years	Longer-term facility, often property-secured
ATO or one-off bill	Months	Short to medium facility with a clear repayment plan

Matching term to purpose means the asset or opportunity helps repay the finance as it produces income.

Test 4: Do repayments fit comfortably within cash flow?

Add the proposed repayments to your 13-week cash-flow forecast and look at the lowest point. Then run a slower scenario — revenue 10% or 15% lower. If repayments are still comfortably covered, you pass. If the slow case turns the forecast negative, the proposal is too tight.

Passed the first four tests and want to know what’s available? Check what you could qualify for — it’s a 60-second enquiry with no credit check.

Test 5: Will you still have a buffer afterwards?

Borrowing shouldn’t use up your last margin of safety. After drawdown and the first few repayments, you should still have your minimum comfortable balance intact. If borrowing leaves you one late customer away from missing a repayment, rethink the amount, the term or the timing.

Test 6: What does waiting cost?

Sometimes not borrowing is the expensive choice:

• The ATO. General interest charge incurred from 1 July 2025 isn’t tax deductible, the ATO confirms. Leaving tax debt unpaid has become more expensive, and large overdue business tax debts can be reported to credit bureaus.
• Lost opportunities. A supplier’s bulk discount, a competitor’s customer list for sale, a contract you’d otherwise decline.
• Your time and stress. Juggling payments every week is a hidden cost of being under-funded.
• Equipment breakdowns. Old machinery that keeps failing costs more than you might think in downtime and repairs.

Weigh these against the total cost of finance. The comparison is often closer — or more favourable to borrowing — than owners expect.

Test 7: Is there a clear way to repay?

Every facility needs an exit: repayments from trading income over the term, a known event (a contract payment, an asset sale, a property settlement), or a refinance once the business is stronger. Write it down. If you can’t describe how the money comes back, the risk is higher than it looks.

What does a pass look like?

A proposal that passes all seven tests reads something like this: “We need a specific amount to buy a specific machine. It adds about this much gross profit a year. The finance runs over the machine’s working life. Repayments are covered even if sales dip 15%. We keep our minimum balance throughout. Delaying would mean turning away the work. It’s repaid from the extra profit the machine produces.”

That’s a proposal a lender can understand — and one you can sign with confidence.

When debt is the wrong answer

Borrowing is rarely the right fix for ongoing losses with no plan to change them. If the business is burning cash because prices are too low or costs too high, funding only buys time — which is valuable only if you use it to fix the underlying problem. Start with break-even, pricing and cash burn before adding debt.

How much should you borrow?

Enough to do the job properly, and no more. A practical way to size it:

1. Cost the purpose in full — the asset or opportunity plus the costs around it: delivery, installation, training, stock, marketing.
2. Add the ramp-up gap — the cash needed until the purpose starts paying back. Your growth plan or 13-week forecast shows it.
3. Subtract what you’ll contribute without dropping below your minimum balance.
4. Test the repayments against a slow-case forecast.

Borrowing too little is a common and expensive mistake: the project stalls halfway, and a second round of funding is needed at short notice. Borrowing too much adds cost and commitments for no benefit.

What will a lender ask you?

Expect questions like these — and have answers ready:

• What exactly is the money for, and how much does it cost in total?
• How long has the business traded, and what’s the turnover?
• What do recent bank statements show about how cash moves?
• Are tax lodgements up to date? Is there any ATO debt?
• What other finance does the business have?
• Is there property or another asset available as security?
• How will the facility be repaid?

Owners who can answer these clearly — ideally with a forecast in hand — get faster, better answers.

One more principle ties the seven tests together: borrow from a position of strength where you can. The owner who arranges a facility while trading is steady has more choice, a clearer story and more time to compare options than the owner who asks the week before payroll.

Ready to test your idea with a real conversation?

If your plan passes the seven tests, the next step is finding the right structure. We consider trading businesses for unsecured and line-of-credit facilities typically from $5,000 to $500,000, sized on turnover and bank statements, and property-secured loans from $20,000 to $5,000,000 over residential or commercial property. Past credit issues and ATO debt are looked at case by case, and it’s business purposes only.

There’s no credit check when you enquire, and your details won’t be shopped around to a crowd of lenders — one team, one conversation. A real person reads what you’ve written and calls you to talk it through. Please fill in the form accurately: the amount, the purpose, your turnover and any property you own. It’s the quickest way to the right answer.

See if you qualify →