3 Guidelines to Consider When Deciding to Spend or Borrow Money

You will never find a definitive answer but there are guidelines to follow when considering which option to take.

I often get asked the question: If I have cash available in the bank, should I use it to make the investment I have in mind-- or should I borrow the money and save the cash?

There are some general principles to think about when making this decision. First off, it's a good idea to have at least six months of reserve in your bank account (when possible). If you have more than six month's reserve, it's likely fine to spend it-- if not, you should be careful.

You should also check in on your line of credit, which should be the greater of ten percent of your top-line sales or eight-five percent of your accounts receivable and fifty percent of your inventory. However, you should not use the line of credit for making long-term investments. It's there for seasonality, working capital ebbs and flows, and emergencies.

Consider This

As an example, let's say you have $350,000 in cash available to you, sitting in your bank accounts. And let's pose the question: Do you invest it in your business to fulfill an unmet need, fund growth, hire staff, buy real estate or inventory, or a multitude of other options? Or should you hold onto your cash and borrow it on a 10-year note at a 7.5 percent interest rate (a reasonable assumption with a Small Business Administration-backed loan)?

The Solution

On the one hand, you have the cash now, so using it is a reasonable choice but, is there something else worth investing in at this time or in the near future?

It isn't outside the realm of possibility that you could get rates better than 7.5 percent, especially now since the Fed just cut their rates.

Then again, what happens if the economy goes south and you need that $350,000? Will you still be able to borrow? Maybe, maybe not.

Ok, I realize I'm waffling a bit here. So what should you do?

A gut reaction is that in a good economy, go ahead and use your cash. Ideally, your business is doing well, and you need to spend to take advantage of a growrth opportunity. You won't have to take on debt, and the risk/reward ratio suggests you'll be compiling cash to replace what you just spent.

And if things go even better than expected and other opportunities present themselves, you can always take a loan at that point.

That said, remember things can change quickly. You'll need to think about contingencies. There's no telling when the next downturn will be, and memories tend to be short.

As the 2000s progressed, there often was talk that the economic cycles that have occurred throughout history were ending. Of course, by late 2007, when the so-called Great Recession started, all that talk disappeared.

Yet even today, little more than a decade later, some of that talk has resurfaced. Don't be fooled: There will be a downturn at some point.

There are never any definitive answers when it comes to financial decisions. You cannot eliminate risk, nor can you ever entirely read the market, let alone the state of your own business. Meantime, you can't predict how lenders will react to both your business as well as economic trends.

While it may seem disconcerting that there are no definitive answers, you can make educated guesses, especially if you trust your gut. If you don't trust your gut, find a trusted advisor or mentor who can provide a fresh perspective on your situation.

The one thing you can't do however, is to let yourself be paralyzed by fear and not make any decisions. As hockey ledgend Wayne Gretzky once noted, you miss one-hundred percent of the shots you don't take. Even if you have to scale back expectations, you eventually have to make a decision.

And as you make your decision, you need to think offensively and defensively.