When leverage makes sense for a profitable company — and when it doesn't

A business that has never needed outside financing tends to treat that as a point of pride, and often reasonably — debt taken on for the wrong reason, or at the wrong price, is a genuine risk. The instinct to be cautious is correct. The instinct to skip the comparison entirely is not.

Self-funding a need out of retained earnings feels free because no interest is paid. It isn't free — that cash had an opportunity cost, and the business gave up the option of holding it as a buffer or deploying it elsewhere. Retained earnings deserves to be evaluated as one option among several, on the same footing as a term loan or a credit line, not treated as the automatic default because it avoids a rate on paper.

A company facing a four-month gap between a prepay obligation and enterprise-client collections has at least six real options: a bank term loan, a revolving credit line, revenue-based financing, equipment finance if applicable, extending supplier terms, or drawing down cash. The headline rate on each tells you almost nothing — what matters is the true cost over the actual term, including fees, and what each option does to the cash floor along the way.

Covenants, personal guarantees, and the effect a facility has on a future raise or sale process don't show up in a cost comparison, and they can outweigh it. A financing decision that looks best on cost alone is not automatically the right one — this is the conversation worth having before signing anything.