How much should my business borrow?
What it takes to achieve that perfect balance between affordability and ambition
Raising funds is a critical lever for business growth—but it’s also one of the most misunderstood. Whether you’re funding expansion, acquiring a competitor, or covering short-term cash flow needs, deciding how much to borrow can feel like walking a fine line between ambition and overextension.
There isn’t a one-size-fits-all answer – and neither should there be – but by asking the right questions you can gain confidence you’re pursuing a funding strategy that supports growth without exposing your business to unnecessary risk.
So, what are the right questions?
1. How is my business doing right now?
Before you even consider borrowing capital, consider the current state of your business. This isn’t about being overly critical (or overly optimistic!), but taking a fair and holistic view of how your business is doing.
Are you profitable/generating cash? Do you have consistent, stable cash flow? Are you managing your existing working capital effectively? How significant are your overheads? How much cash headroom do you have?
his initial health check helps determine whether now is the right time to borrow and will also set the groundwork for how much you are likely to be able to borrow. For example, if your business is already under financial stress, taking on debt could create additional pressure unless it’s part of a clear turnaround strategy. If your business is profitable and has healthy cash flow, but requires additional capital to fuel growth, raising this cash via debt could be a smart way of accelerating your growth plans.
2. What’s the plan?
The next step is to focus on the why: why do you need funding? Are you:
- Expanding into a new market?
- Developing a new product?
- Acquiring another business?
- Investing in equipment or tech?
- Navigating seasonal cash flow dips?
Each use case comes with its own funding requirements and risk profile. For example, a growth initiative might not generate returns for 6–12 months. That means your loan repayment strategy will need to bridge that gap. And how credible is your growth plan – is it something that a lender can buy into? What would happen in a downside scenario?
If you’re acquiring a competitor, you’ll need to assess both the cost of the deal and the additional working capital required post-acquisition.
In short: the amount you borrow should be tied directly to a well-considered, credible plan that is robust enough to be stress-tested. Lenders want to see how the funds will turn into growth, even if at a slower pace than expected—and how that growth will service the debt.
3. How much can I afford to borrow?
After understanding what you need and why you need it, the next key question is: How much debt can my business reasonably service?
A helpful rule of thumb is the 3x leverage ratio – where total debt doesn’t exceed 3 times your EBITDA (earnings before interest, taxes, depreciation, and amortisation). Above this point, a lender will need to really interrogate the anticipated growth that would enable such leverage to be affordable – it doesn’t mean we can’t do it, but we would need to have some thoughtful conversations.
And EBITDA only tells part of the story too. Calculating affordability of debt means a thorough understanding of how money actually moves through your business, and for younger or less-established companies – ones that don’t have a full time CFO for example – this isn’t necessarily a given.
Are you taking into account capital expenditures? How long does it take to get paid for the work you do? How long do you take to pay your own creditors? It’s not uncommon to find the working capital cycle runs in the wrong direction and the more that a business grows, the more money it needs upfront to service its projects. The same can be said for cash conversion – once you have calculated what this actually is, it turns out you should probably only be leveraging 2.5x EBITDA for repayments to stay affordable.
We are a growth lender, so we are obviously very supportive of businesses raising finance to fuel their growth, but it is in no one’s interest to over-leverage and so having a thorough grip on the numbers can help make sensible, but enterprising decisions.
4. Would a tranched facility be a better fit for my plans?
Tranching enables a business to draw down the total value of their facility in stages. For example, the total agreed loan might amount to £8m, but only £1.5m is drawn on day one, with plans for the rest of the sum to be drawn down at later dates.
Not all lenders will offer tranching, but for those that do, it offers businesses additional flexibility and support for their long term growth plans. Long term is the key point here, though. To be able to offer an effective tranched facility, the lender needs to have a thorough understanding of a business’ long term growth plan – and buy into it!
This type of structure works very well for buy-and-build strategies, as the acquisitive business might have an idea for future targets and their value, but no exact numbers or timelines. A tranched facility offers the flexibility to act quickly and decisively when the right opportunity comes along.
5. What about the cost of not borrowing?
Choosing not to borrow has a cost too—often overlooked in the pursuit of organic growth. This is known as opportunity cost.
In fast-moving markets, growth delayed is sometimes growth denied. For example, not borrowing and then missing out on the chance to acquire a key competitor could mean losing out on margin gains, customer base expansion, or strategic positioning. If the expected return on investment exceeds the cost of borrowing, then not taking the loan might actually be the riskier move.
6. What is the the right product for your business?
While this article focuses on how much your business should borrow, it’s worth noting that the type of financing you choose can influence that decision. In general:
- Asset-backed loans are cheaper, but limited by the value of your collateral
- Cash flow loans offer more flexibility but usually come at a higher cost
- Equity funding can end up more expensive in the long run (because you give up ownership), but can be more appropriate for earlier stage businesses, high-risk situations and those where the expertise of a VC firm will be valuable
Good advice is to start with the cheapest viable capital – for example, if you have assets, leveraging these first. The challenge will come when you have punchier growth plans that require more substantial capital – and that is where speaking with specialist growth lenders is going to be your best bet.
Within reason, it is wise to start with the cheapest viable capital. If you have assets, leverage those. If you’ve maxed these out and still need funding, move to cash flow solutions. If neither are an option, it may be time to bring in equity.
Final thoughts
Borrowing is both a strategic decision and a financial calculation. The “right” amount to borrow is the one that aligns with your business’s goals, affordability, and risk tolerance—not just the maximum a lender is willing to offer.
Ask the tough questions early. Build in buffers. Prove your case with data. And when in doubt, borrow with a purpose — not just possibility.
