As a founder, the moment you decide to scale is thrilling. It is a moment of pure potential, but it is also the moment when the financial stakes become real. You’ve likely heard the common advice: don’t raise capital until you absolutely must. That’s solid wisdom, but once you do need it, the type of capital you pursue and how you use it can define your company’s future.
For many early-stage entrepreneurs, borrowing often feels like a necessary evil, a temporary bandage. But chief financial officers, or CFOs, view it differently. To them, borrowing is a tool, a strategic lever that can either accelerate growth responsibly or quickly sink an otherwise promising venture. We spoke with a group of seasoned CFOs and financial strategists who have guided multiple companies through growth phases and exits. Their consensus was clear: most founders misunderstand the concept of “smart” borrowing.
Here is what they want you to know.
Borrowing is Not Just a Line Item, It’s a Product
The biggest shift in mindset a founder needs to make is moving away from seeing debt as simply money owed. Smart borrowing means viewing the financing instrument itself as a specialized product. Just as you wouldn’t use a screwdriver to hammer a nail, you shouldn’t use an expensive revolving line of credit to fund a multi-year capital expenditure.
A simple example illustrates this point. If a founder needs quick cash flow to cover a payroll gap during a high-sales month, a short-term, low-interest working capital loan might be appropriate. The repayment schedule is tight, but the cost of capital is minimized. Conversely, if a founder is planning a long-term, stable investment, like purchasing a key piece of property or equipment, a type of debt with a predictable, long-term payment structure is far more suitable. For personal founders, this is the same logic that leads people to choose a fixed-rate home equity loan for a major renovation. The structure of the debt must align perfectly with the duration and nature of the asset or expense it is funding.
One CFO, Sarah Chen, put it plainly: “Founders often shop for the cheapest rate without considering the total cost of the debt product. The covenants, the repayment terms, the flexibility or lack thereof – all these are features of the product. The interest rate is just the price tag.”
The True Cost of Capital Lies in the Covenants
While everyone focuses on the interest rate, the seasoned CFO’s eyes go straight to the covenants. Covenants are the rules, restrictions, and conditions attached to a loan or debt agreement. They can range from benign reporting requirements to highly restrictive limitations on your operations.
For instance, a lender might impose a covenant stating that the company’s debt-to-equity ratio cannot exceed a certain threshold. This might seem fine until a growth opportunity requires a significant equity investment. Suddenly, the covenant handcuffs your ability to raise money or make strategic moves without the lender’s explicit permission.
Another common covenant is a restriction on asset sales. If a key part of your business is acquired by the lender as collateral, you may not be able to sell or divest that part of the business, even if it’s a smart strategic move, without paying off the debt first. Smart borrowing is about understanding the potential operational cost of compliance, not just the dollar cost of interest. Every covenant limits your freedom, and that limitation has a real value that must be weighed against the benefit of the loan itself.
The Cash Flow Multiplier Test
A critical error founders make is borrowing to plug a hole. Smart borrowing is always about amplifying growth. A useful rule of thumb from our experts is the “Cash Flow Multiplier Test.” For every dollar borrowed, the capital should predictably generate significantly more than a dollar in net cash flow over the loan’s lifetime.
If you’re taking on debt to cover operating losses, you are simply delaying the inevitable and incurring a higher cost to do so. The borrowed money should fund an expansion of capacity, a strategic acquisition, or an investment in a highly efficient technology that directly generates greater revenue or dramatically lowers costs.
If the borrowed money is going into marketing, the marketing ROI must be clearly quantifiable and proven to exceed the cost of the debt by a healthy margin. If the money is going into inventory, you must have high confidence in the velocity of sales and the profit margin on that inventory. If you cannot articulate the precise, measurable, positive return on investment for the borrowed capital, you should not be borrowing it.
Equity Isn’t Always More Expensive
Many founders view debt as inherently cheaper than equity because it avoids dilution. This is a narrow view. While debt is technically cheaper in the short term, the long-term cost can be crippling if the venture fails to execute or if the covenants restrict agility.
Equity partners bring more than just money; they bring networks, expertise, and a shared incentive for the company’s success. They are patient capital. Debt, conversely, is impersonal and unforgiving. A missed payment triggers a financial clock that can lead to seizure of assets or even bankruptcy.
The smartest founders use debt when the path to profitability is clear and predictable. They use equity when the path is still exploratory, and the strategic guidance of an investor is as valuable as the money itself. The true cost of capital must factor in the risk profile of the business. Highly predictable businesses can handle more debt. Early-stage, high-risk ventures benefit from the flexibility and shared risk of equity.
Building the Relationship Before You Need It
The final piece of advice from the CFO community is perhaps the most practical: establish relationships with potential lenders and financial partners long before you need the money.
Lenders look for predictability and trust. A founder who suddenly appears when their bank account is low is a massive red flag. A founder who has maintained an active banking relationship, shared their business plan updates, and perhaps even secured a small line of credit just to show financial prudence is viewed as a reliable partner.
Borrowing intelligently is a marathon, not a sprint. It involves strategic planning, a deep understanding of the financial product you are acquiring, and a realistic assessment of your company’s ability to generate cash flow. By adopting the CFO mindset, seeing debt as a highly strategic instrument defined by its structure and covenants, not just its interest rate, you transform borrowing from a stressful necessity into a powerful accelerator for growth.
Here’s the draft! How does it feel? Ready to move on to the next stage?
Also Read: From Gut Feel to Intelligent Forecasting for CFOs: The Evolution of Financial Decision-Making
