In an era where every dollar counts, entrepreneurs face a pivotal choice: stay lean and risk missing out, or tap into debt and accelerate growth. This comprehensive guide will illuminate why now is the opportune moment to leverage moderate leverage levels, explore your borrowing options, reveal strategies to borrow strategically and responsibly to unlock growth, and share data on who is borrowing and why. By the end, you will be empowered to unlock the fuel that propels your business forward.
Why Borrowing as a Growth Tool Matters Now
The macroeconomic landscape shows private debt relative to GDP at its lowest level in two decades. Total private nonfinancial credit in the U.S. stands at roughly $41.7 trillion, growing a modest 2.0% from Q4 2023 to Q4 2024—well under the long-run average of 5.3%.
Despite this moderate system-wide striking, business credit has ticked up by 2.5% to about $21.6 trillion, while household borrowing rose 1.5% to $20.2 trillion. Public corporations have slightly reduced gross leverage, and their interest coverage ratios (ICRs) remain at comfortable levels.
However, private firms tell a different story. Their ICRs now sit at the lower end of historical ranges, signaling vulnerability to rate hikes. In other words, although the system as a whole is less leveraged than in recent decades, smaller private firms face rate pressure and must proceed with caution.
For business owners, this represents a fleeting opportunity: the overall debt-to-GDP ratio is low, yet you can still access capital—provided you borrow with discipline.
Exploring Your Borrowing Options and Costs
The first step on your borrowing journey is understanding the spectrum of funding sources available. From traditional bank loans and SBA-backed programs to lines of credit, merchant cash advances, and fintech solutions, each pathway has distinct features, costs, and risks.
Traditional banks remain a cornerstone of small-business finance. Yet, the Federal Reserve reports that interest rates on small-business loans are near the highest levels since 2008, and banks have tightened collateral requirements, reduced credit limits, and shortened maturities for 13 consecutive quarters.
- Traditional Bank Loans: Competitive interest rates but rigorous underwriting and collateral demands.
- SBA 7(a) Loans: Government-backed guarantees enable extended and flexible amortization schedules and lower down payments.
- Lines of Credit: Interest accrues only on withdrawn funds, providing flexible funds for day-to-day needs.
- Fintech and Alternative Lenders: Fast approvals and disbursements but higher APRs and fees.
Each option carries a unique cost of capital. SBA 7(a) loans often cap rates at prime plus 2.75%, while merchant cash advances and online lenders may charge annual rates above 20% or impose hefty factor fees.
Selecting the right source involves matching the financing type to your purpose: equipment purchases, payroll smoothing, expansion projects, or emergency reserves.
Borrowing Smart: Avoiding Overleverage and Managing Risk
Bearing debt does not mean surrendering control. Instead, adopt a strategic framework to ensure borrowing supports growth without jeopardizing your balance sheet.
- Conduct a Debt Service Analysis: Align loan payments with cash flow peaks and valleys to maintain liquidity.
- Establish realistic repayment timelines based on revenue projections and business cycles.
- Diversify Your Capital Stack: Combine loans, equity, and retained earnings to spread funding risk across diverse capital sources.
- Maintain a Financial Cushion: Target an interest coverage ratio above three to weather unexpected costs and revenue shocks.
Start conservatively by testing new initiatives with smaller loans under $150,000. This incremental approach allows you to refine operations, validate assumptions, and build a track record for larger financing rounds.
Regularly monitor your debt-to-EBITDA ratio, cash-on-hand days, and ICR. Setting internal thresholds will trigger proactive refinancing or capital raises before liquidity strains emerge.
Current Trends: Who's Borrowing, How Much, and Why
The “2025 Capital Paradox” describes a surge in financing demand paired with persistently tight credit conditions. According to the Fed’s 2024 Small Business Credit Survey, 59% of firms sought new financing last year—driven by funding operating expenses and expansion—yet only 37% applied for loans, lines of credit, or merchant advances, reflecting application rates consistent with pre-pandemic norms.
Of the applicants, 40% sought less than $50,000, demonstrating a preference for smaller, manageable loan sizes. Nearly 40% of businesses carry more than $100,000 in existing debt, while roughly 29% maintain no debt, highlighting diverse capital strategies across the market.
Traditional bank approval rates declined from 44% in 2023 to 39% in 2024, prompting businesses to explore community banks, fintech platforms, and specialized lenders. Online lending originations, as measured by Lendio’s Small Business Lending Index, rose nine points year-over-year, while small-business lending volumes climbed 7.5% in Q2 2025 compared to both the previous quarter and the prior year.
Geographic disparities persist: rural areas, or “banking deserts,” face steeper supply constraints, making it harder for entrepreneurs in underserved communities to secure financing at reasonable terms.
Record SBA and Government-Backed Lending
SBA 7(a) lending has seen its strongest run since tracking began in 1991. In FY 2025, the program delivered:
Notably, over 50% of these approvals are for loans under $150,000, and more than 80% under $500,000. This trend highlights entrepreneurs’ preference for incremental growth capital to test ideas and finance targeted investments.
Sector patterns include:
- Accommodation & Food Services: Leading in both volume and average loan size, reflecting the capital-intensive nature of restaurant and hospitality operations.
- Health Care & Social Assistance: Accelerated borrowing to expand clinics, acquire equipment, and address community health needs.
- Professional, Scientific & Technical Services: Robust demand for financing innovation, talent acquisition, and market diversification.
- Manufacturing: Mixed trends, with financing volumes down from 2023 peaks but steady demand for equipment and process upgrades.
Charting Your Path Forward
With these insights, you can craft a borrowing strategy aligned with your growth vision. Begin by assessing your existing capital structure and identifying areas where debt can unlock opportunities without compromising stability.
Engage multiple lenders—including banks, SBA partners, and fintech firms—to compare terms and negotiate favorable rates. Leverage SBA programs for cost-effective, long-term financing options, especially for expansions and equipment investments.
Establish rigorous monitoring of key metrics: debt-to-EBITDA, days cash on hand, and ICR. When ratios approach pre-defined thresholds, proactively explore refinancing, equity infusions, or alternative capital to preserve flexibility.
Remember, borrowing is not a last resort but the catalyst for innovation, expansion, and enduring success. With discipline, foresight, and a clear plan, you can unlock your capital, scale with confidence, and navigate the evolving credit landscape for sustained growth.
Your journey toward smart borrowing begins now—embrace the momentum, harness the power of debt wisely, and build the resilient enterprise you envision.
