Can I use growth funds to pay old bills?

November 2010

"I'm about to take out a large bank loan to 'grow the business,' but in reality half the money will be used to pay past-due bills and wages. Will the bank ever look at how I actually spent my loan money?"

Mike: Assuming you showed these old liabilities on the balance sheet you gave the bank, you're free to use at least some of your loan to clean up your debts. Ultimately, this is a judgment call on your part: Will you have enough cash left over to pursue your growth plans if you pay all your creditors? If not, then arrange to pay your old bills more slowly.

Your banker probably feels that the loan can help you stabilize your current business and carry out your expansion plans at the same time. After all, the bank's goal is to get repaid out of your future cash flow, not to sell off collateral or collect on personal guarantees. So they want you to build a successful, healthy business. How you do it is largely up to you.