WHAT YOU NEED TO KNOW BEFORE YOU BORROW MONEY FOR YOUR SMALL BUSINESS STARTUP

Launching a business is exciting — but borrowing money to fund it is a major financial decision. Before you take on debt, you need a clear plan, realistic projections, and an understanding of how lenders evaluate new businesses.

Here’s what to know before you borrow 👇

1️⃣ Understand the different financing options

Each type of business financing has its own approval criteria, restrictions, and risks.

✔️ term loans

✔️ business lines of credit

✔️ equipment financing

✔️ secured vs unsecured financing

✔️ personal savings or investor equity

What you qualify for depends on revenue, years in business, personal credit, and industry risk level.

2️⃣ Know exactly how repayment works

Borrowed money must be repaid monthly, and the terms vary widely by lender.

✔️ fixed monthly payments

✔️ set repayment term

✔️ interest costs

✔️ penalties for missed payments

Before applying, build a business plan with at least **3 years of financial projections**. You need to know whether the revenue you expect will realistically cover operating costs *and* loan repayment.

3️⃣ Defaulting can destroy both business and personal credit

If you fall behind on payments:

❌ your business credit score drops

❌ your personal credit may be impacted

❌ future borrowing becomes more expensive

❌ some lenders can pursue personal assets

Always ask lenders upfront for typical interest rates and payment structures so you can stress-test the numbers before applying.

4️⃣ Understand your maximum allowable debt

Lenders use several ratios to evaluate your risk level:

✔️ **Debt-to-Income Ratio (DTI):**

Your monthly debt payments should be no more than **28%** of your total income (some lenders allow up to 36%, but 28% is safer).

✔️ **Business Debt Load:**

Most lenders won’t allow business loans to exceed **15% of annual revenue** for early-stage companies.

If your numbers are higher than these benchmarks, approval becomes unlikely — or the cost of borrowing will be much higher.

5️⃣ Know exactly how the borrowed funds must be used

Not all financing is flexible:

✔️ equipment loans must be spent only on equipment

✔️ business lines of credit can be used for any expense

✔️ term loans may require proof of use

✔️ some lenders prohibit using funds for payroll or debt consolidation

This is why you need a clear breakdown of expenses in your business plan and financial projections.

💬 Final Thought

Borrowing money can accelerate your business — or overwhelm it. The key is planning. When you understand your financing options, repayment obligations, and borrowing limits, you make decisions from a position of strength, not panic.

If you need help deciding whether borrowing makes sense — or which financing option fits your business — reach out and The Frontline Mortgage Group will walk you through it step-by-step.