Why do businesses borrow money? The good reasons and the risky ones

Businesses borrow for a handful of ordinary reasons: to buy equipment or stock, to grow, to cover gaps in cash, or to buy a business or property. Borrowing is sound when the money helps you earn more than the borrowing costs, and you can comfortably afford the repayments. It is a warning sign when it covers work that loses money, pays for things the business does not need, or only delays a problem.

Debt is not good or bad in itself. The reason behind it, and whether you can carry it when things go quiet, decide which one you have.

Key Takeaways

Is it normal for a business to borrow?

Yes. In one survey of small business owners, nearly two-thirds said they had used business finance at some point. The survey was American, so treat the exact figure loosely. The point holds here too: borrowing is part of running a small business, whether you are starting out, keeping steady, or planning your next step.

The same survey found most people borrowed modest amounts, not huge sums. Most are solving a specific problem or taking up a specific chance.

A common worry is that borrowing means you are struggling. Usually it does not. Many owners borrow because they can see a way to grow and do not want to wait years to save for it.

The reasons that usually pay off

The reasons that tend to work all have one thing in common. The money goes into something that helps the business earn, and you can point to how.

Equipment that saves time or labour

This is the clearest case. Say a joinery business buys a machine that cuts labour costs and speeds up production. If the saving and extra output each month are bigger than what the loan costs, the machine pays for itself. Kiwibank uses this joinery example, and it applies equally to a café buying a better oven or a builder buying a trailer or tool set that they use every week.

The test is simple: does it get used, and does it earn? A vehicle, tool or piece of technology that works every day is a good reason to borrow. One that sits in the corner is not.

Stock you know you will sell

Buying stock ahead of a busy season can be sound, because the stock turns back into cash. A shop that stocks up before Christmas is a fair example. The risk is stock that does not sell, which leaves you owing money for goods on the shelf. If you are not sure it will move, borrow less or buy less.

Growth you can already see demand for

A second site, extra staff to handle more orders, or more capacity to take bigger jobs. Borrowing can let you grow faster than your profits alone would allow. That is the whole appeal: you act now, while the chance is there, instead of waiting years.

Growth is a good reason when the demand is real. It is a poor one when you are hoping customers will turn up.

Buying an existing business

Buying a business that already trades can be a sensible way to grow. It also usually means a bigger loan than anything else on this list, so the checking matters more. We cover how this works in finance to buy a business.

One thing to know early: banks do not usually fund the full price. Generally they will finance between 40 and 60 percent of the purchase price of a business. A well-known franchise can sit at the top of that range or a little above. For commercial property such as motels and hotels, banks tend to lend 50 to 65 percent of the valuation. You need to find the rest yourself, and lenders look at the business's cash flow, its history and your experience of running that kind of business.

Cash gaps: fair, but only if the gap is short

Cash flow gaps are the most misunderstood reason to borrow.

Picture a builder who finishes a job but is not paid for 30 days, while materials and wages are due now. Or a photographer who is busy in spring and summer and has bills to pay in January. The business is fine. The timing is off. Borrowing to bridge that is a sound use of credit.

An overdraft is built for exactly this. It covers the gap between paying your costs and getting paid by customers, and it can be a flexible and cost-effective way to handle ups and downs in cash.

The warning is about why the gap exists. If the money is on its way, borrowing is fine. If the gap is there because the business is losing money, borrowing does not fix it. It makes it bigger.

Some gaps come from bad luck, not poor management. You lose a contract, a customer goes under owing you money, or a vehicle is written off. Borrowing in those cases is not automatically wrong. It can give you breathing space while you win new work or wait for an insurance claim. What matters is that you have a plan to recover, and that the borrowing makes sense on the numbers.

A phrase we hear from owners sums up the danger: "I am busier than ever but my cash flow is worse than ever." When that is true, look at your margins before you look at a loan.

The warning signs

These are the reasons that should make you stop and think.

• Borrowing to support work that does not make a profit. It creates ongoing pressure, and the loan has to be repaid whether the work makes money or not.
• Borrowing for work where payment is uncertain. If you may not get paid, you are taking on a fixed cost against a possible income.
• Buying assets you will barely use. Equipment or vehicles that do not help the business strain your cash flow and leave you less room to move.
• High-interest borrowing. Expensive lending raises your costs quickly and makes the debt harder to manage. Kiwibank's advice is to avoid relying on high-interest third-tier lending where you can.
• Funding your personal life from the business. An extended holiday or a second vehicle is not a business reason to borrow. Make it a rule not to dip into the business for personal spending.
• Spending a dollar to save thirty cents. When cash is tight, the best dollar is the one you do not spend.

What too much debt does

There is no single amount of debt that is right for every business. The better question is whether you can keep up the repayments now, and still manage if things change. Debt levels should leave you able to cope with surprises, not running with no room for error.

Heavy debt costs more than the repayments. It eats cash flow, makes it harder to reinvest, and limits your chance to buy equipment or expand. When cash is pulled away from the parts of the business that do the work, the quality of what you sell can slip. It also weighs on you personally, and that affects your decisions.

Matching the finance to the reason

The cheapest loan is not always the right one. The length, the security the lender wants and how flexible it is all matter, not just the price. As a rule, match the type of finance to the purpose.

Reason	Finance that usually fits	Why
Larger one-off purchase	Term loan	A lump sum repaid over a set period
Equipment or vehicle	Equipment finance or hire purchase	Secured against the asset you are buying
Short gaps in cash	Overdraft or line of credit	You draw on it only when needed
Customers slow to pay	Invoice finance	Frees cash tied up in unpaid invoices
Buying a business	Bank lending, usually part of the price	Banks commonly fund 40 to 60 percent

For the equipment options, our guide to hire purchase and leases explains how they differ.

Borrowing is not the only option

Before you borrow, check the alternatives. You can use cash the business generates itself, bring in investors or shareholders, or fund growth slowly from savings and revenue. Family and friends can help, but put clear written terms in place to protect the relationship.

A word on using your house

Banks will usually lend up to 80 percent of the value of your home or rental properties. Borrowing against the equity in your house can cost less, because home loan rates are more attractive than business finance rates. We understand why that appeals.

But it is a real trade-off. You are moving business risk onto the family home. If the business struggles, your house is on the line. Think hard before you do it, and talk to your accountant first.

Security is also how loans are priced. Unsecured business loans are often available under $50,000, but the rates are higher because the lender has nothing to fall back on. Few lenders will take plant and equipment as security, and those that do are unlikely to lend more than 60 or 70 percent of its value.

What it can cost

The Reserve Bank reports that the average new overdraft rate for small businesses was 10.06 percent in August 2026. That is only one product, and your rate depends on your business and the security you offer. But it gives you a feel for the cost.

Here is a simple example. Say you borrow $20,000 on an overdraft at 10 percent a year. If it stays fully drawn for a year, the interest is about $2,000 ($20,000 x 10 percent). That is roughly $167 a month before you repay a cent of the original amount. So whatever the money buys needs to earn more than that, or it is losing you money.

Questions to ask yourself before you borrow

Work through these honestly. They are the same questions a lender will ask, and you should be able to answer them first.

1. Can I comfortably afford the repayments? Not just in a good month.
2. Would I still manage if my sales dropped? Test the repayments against a slower year.
3. What will this money do? Does it bring in income, save costs or support growth?
4. How much extra profit can I turn it into? If you cannot put a rough number on it, be careful.
5. Have I looked at other ways to fund it? Cash, investors or a smaller purchase might do the job.
6. Do I understand the full cost? Interest, fees and the term. Ask for the total in writing.
7. Have I borrowed the right amount? Work out exactly what you need. Borrow only what your forecast comfortably supports.

A cash flow forecast is the best tool here. It is a simple month-by-month picture of money coming in and going out. Lenders now want to see several of them before they approve or renew a facility. It is just as useful to you. It shows what you need, flags trouble early, and lets you track how you are doing each month.

If you are starting out, plan to cover your one-off costs plus at least the first six to 12 months of running costs, so a slow start does not sink you.

When debt starts to weigh on you

If repayments are getting heavy, do not hope it fixes itself. Talk to your accountant early and agree a plan. Watch your cash flow, and ask your accountant about the debt to income ratio and the interest cover ratio. These simply show how big your debt is compared with what you earn, and how easily you cover the interest. They can warn you before a problem gets serious.

Any change to how your debt is structured, such as pulling it together into one loan, should be discussed with your accountant first. Interest on business debt is generally tax deductible, which can affect how you arrange things, so get proper advice before you refinance.

We suggest cutting costs to help repayments only where it will not hurt the quality of what you sell. Cheaper but worse is rarely a good trade.

Our view

For most small businesses, the sound reasons to borrow are the ones where you can draw a straight line from the loan to more money coming in or less going out: equipment you will use, stock you will sell, growth with demand behind it, and short gaps where payment is on its way. The risky ones are where the loan is covering for something else, such as unprofitable work, personal spending or a business that is already losing money.

If you are weighing a loan for any of these reasons, we are happy to look at the numbers with you at Deplexifi NZ.

Frequently Asked Questions

Is it bad for a business to have debt?

No. Debt that helps you grow, work more efficiently or smooth out cash flow can support long-term success. Debt that creates pressure without delivering enough value does the opposite.

How much business debt is too much?

There is no single number. It is too much when you cannot comfortably meet repayments, or when a dip in sales would leave you with no room to cope.

Can I borrow to cover a cash flow problem?

Yes, if the gap is short and the money is coming, such as waiting for customers to pay. If the gap exists because the business is losing money, borrowing will not solve it and a conversation with your accountant comes first.

Do I need security to borrow?

Not always. Unsecured loans are common under $50,000, but they cost more. Loans secured against property or assets are usually cheaper.

Will a bank fund the whole price of a business I want to buy?

Usually not. Banks generally finance 40 to 60 percent of the purchase price, so you need to plan for the rest.

Borrowing to cover a cash shortage caused by unprofitable work. It feels like a timing problem, but the loan only makes the underlying loss bigger.