Business owners who experience slow sales or get shut down during the winter months may soon have to tap their personal savings or take on debt to make it through. But there are questions you must ask yourself before borrowing to save your business.
For some brick-and-mortar businesses, such as restaurants, salons and gyms, survival is going to require a lot of creativity, resourcefulness and sheer endurance.
And maybe cash. Congress still hasn’t agreed on a second stimulus package. On Oct. 18, House Speaker Nancy Pelosi set a 48-hour deadline for reaching an agreement.
However, at the moment, the status of the stimulus is uncertain – and not every business will qualify for whatever aid it offers.
Be careful about taking on additional debt
In the meantime, business owners who experience slow sales or get shut down during the winter months may have to tap their personal savings or take on debt to make it through.
A recent CreditCards.com survey showed 70% of small business owners relied on credit cards, loans or savings accounts to get them through the pandemic.
Borrowing makes sense in some emergencies, but if you’ve already racked up credit card debt or loans to cope with COVID-19, it’s important to think carefully about borrowing any additional money. If you’re maxing out your credit to keep a business afloat, you could be putting your financial health and that of your family at risk.
And debts don’t just go away if a business closes. It has gotten harder in recent years to discharge debts through bankruptcy.
For years after the last recession, I received letters from readers of this column who were still paying down enormous debts they incurred at businesses that ultimately closed or failed.
If you are close to retirement age, you may be better off shuttering a struggling business and preserving your nest egg than making decisions to borrow that will delay your retirement for another 10 years.
See related: Financial strategies if you’re self-employed
3 questions to ask before borrowing
So how do you know if you should borrow to keep your business afloat? Here are some questions to ponder.
1. What is the outlook for my industry in the next year or two?
Some industries may be very challenged in the next 12-24 months by limits on capacity in their place of business, potential lockdowns and other realities. If your industry is severely challenged and you are running out of cash, borrowing could be a mistake.
There is no shame in closing your doors and getting a job – or starting a different business – so you can support your family. You can return to your industry later if things pick up, but that will be hard to do if you have run through your life savings and run up debt.
2. What is the outlook for my business in the next year or two?
What’s happening in your industry doesn’t necessarily dictate what happens to your business.
For instance, some entrepreneurs who stage live events quickly pivoted to virtual events and are doing well. Others found that they could not bring in enough revenue that way.
If your business is thriving, then you’ll have a greater capacity to pay back any debts you take on than if it is struggling.
See related: How to pay off business debt
3. What is my financial status now?
If your personal and business finances have generally been healthy until the pandemic and you still have cash reserves, it will be easier to borrow at attractive rates than if you’re running on empty.
If you borrow when your finances are in bad shape, lenders will likely charge you higher interest, adding to your costs.
You may be better off trying another method of raising cash, such as doing a clearance sale or running a promotion that brings in more sales.
There aren’t any one-size-fits-all answers to these questions. When in doubt, talk with an expert advisor such as your accountant or seasoned entrepreneurs who’ve been through other downturns.
Though most owners are very passionate about their businesses, business is only one part of life. It’s important to think about your total financial picture when you make any decisions to borrow to save a troubled business.