How to check if your small business has enough cash before you borrow

Before you sign for a loan, run the before-you-borrow cash check: put your next 30, 60, and 90 days of costs on one page and write the numbers down. If cash on hand cannot cover payroll, rent, taxes, supplier invoices, insurance, loan payments, and recurring software, the squeeze is cost coverage, not expansion. In the CFO Survey, 20 percent of small firms faced financing limits that blocked cost coverage or new opportunities, while about 10 percent of large firms did.

Your cash test comes before the loan

• List every cost that must be paid in the short term. Put must-pay costs in one column and can-delay costs in another. If a cost is uncertain, put it in the next month and the one after, not in a hopeful column.
• Compare cash on hand with expected collections. Use collections you can expect, not the best case. If any line is negative, you do not have enough cash to cover costs.
• Name the constraint in one sentence. If it is a cost-coverage problem, the first sentence changes the answer. If it is an expansion problem, the second one may justify a loan. If you cannot say which one it is, keep checking the cash lines.
• Check the current interest rate on the loan you are considering. Ask for the total cost of borrowing, not just the headline rate. Do not accept a rate that only works in a spreadsheet.
• Test a rate rise before you sign. Make a second payment at a higher rate and check the cash line. If the cash line turns negative, the loan is too risky for your current cash position.

The common mistake is to borrow to cover payroll because the loan feels like growth. If the cash cannot cover costs, borrowing adds interest to a hole and makes the next month harder.

Honest cash lines change the decision

A cash line is only as good as the timing behind it. Payroll is not the same as a supplier invoice that can be pushed. Rent is not the same as a marketing spend that can wait. Your job is to separate costs that must leave the account from costs that can be delayed. That separation tells you whether the squeeze is real or just a timing problem.

If the negative line comes from payroll, the business needs a faster fix than a new machine. A supplier invoice may be negotiable. A loan payment may require a schedule conversation with the lender. Each answer changes the borrowing decision.

Small firms feel financing limits first

The survey results show the pressure on small firms. The CFO Survey was fielded from August 17 to September 4 and included 517 financial executives. Smaller firms with fewer than 500 employees reported financial constraints at about twice the rate of larger firms.

Fewer firms planned capital investments over the next six months than two quarters earlier. For companies that were not planning to invest, roughly 42 percent pointed to tight financing conditions or the desire to keep cash on hand, versus 32 percent six months earlier. The direction is clear: when cash is tight, firms stop spending on growth first.

Only 12 percent of surveyed firms were not filling open positions or were cutting workers, and more than half of that 12 percent blamed financial constraints. If your constraint is cost coverage, hiring and payroll are the first places the pressure shows.

The interest rate changes the borrowing decision

Twenty percent of financial decision-makers named current interest rates and possible future hikes as a top concern. That concern belongs in your borrowing decision, not in a footnote. If the loan is for expansion, the rate must fit your cash after the final month of your cash test. If the loan is for covering costs, the rate is the last thing you should be solving.

Write the decision down, then run the same check after the next invoice, the next payroll, and the next rate change. Keep the date and the cash line next to the loan terms.

This article is general information, not tax or financial advice. Consult a qualified professional about your situation.