Borrow Wisely: The Debt Traps Waiting to Blow Up Your Business (And Life)

My friend Bill was sitting in his car in a parking lot, hands shaking.

He was staring at a letter. Our main supplier—responsible for 80% of the SKUs in a business we’d invested in together—was terminating the relationship. Effective immediately.

Bill was holding a seven-figure personal guarantee on that business’s debt.

If the company went under, the bank wasn’t coming for the LLC. They were coming for Bill. His home. His brokerage accounts. His savings.

If the company went under, the bank wasn’t coming for the LLC. They were coming for Bill.

Turned out to be a clerical error. “Sorry, disregard.”

But those 20 minutes aged him—and burned into both our minds just how fast debt can turn from tool to threat.

I’ve been in eCommerce for close to two decades now. In that time, I’ve watched debt build businesses and destroy lives—sometimes both in the same year.

The owners who get hurt aren’t stupid. They’re busy. They’re growing. They click the button because the money is right there and they need it now.

What they don’t do is understand the terms, model the cashflow, or think through what happens if things go sideways.

Bill and I recently sat down to talk through the most dangerous debt mistakes we keep seeing. Here’s what made the list.

No Cashflow Forecast Before Borrowing

Before you take on any debt, you need a 13-week forward-looking cashflow forecast showing exactly when payments hit and whether you can cover them.

This is especially brutal with merchant cash advances. MCAs pull a daily percentage of revenue. If your margin is 12% and they’re taking 10%, you’re running the business on 2% for the entire repayment window.

The businesses that get crushed almost never saw it coming—because they never mapped out the future.

No detailed model showing how you’ll pay it back and how it will grow your business? Don’t click that button.

Reactive Instead of Proactive Financing

Banks are the worst.

Business healthy? “We’d love to offer you a substantial line of credit!”

Desperately need liquidity to survive? “Sorry, can’t help.”

They want 2-3 years of clean financials, consistent revenue, solid margins. The approval process takes 60-90 days. Mountains of paperwork. Multiple rounds of questions.

If you’re in crisis—revenue dropping, margins compressing, cash tight—you won’t qualify. The bank will see the stress in your numbers and pass.

The best time to get a line of credit is when you don’t need it.

Here’s what matters: once approved, most smaller facilities don’t have heavy ongoing covenants. If you secure the line while healthy, then your business later deteriorates, you can often still draw on it.

That optionality saves businesses. But only if you set it up before the storm—not during it.

Build relationships with local and regional banks now. Look into SBA 7(a) lines of credit. The process is annoying. Do it anyway.

Not Tracking ROI Religiously

A member of our community recently opened up about taking a six-figure EIDL loan during COVID because the rate was cheap. Eighteen months later, he wasn’t sure where it went.

Now he’s in a really tough spot paying it back.

It’s a mistake that’s easy to make unless you’re guarding against it. When your account suddenly has an extra $500K, discipline disappears.

Every borrowed dollar needs an explicit purpose, a projected return, and actual tracking against that return.

If you take a loan and park it, at minimum put it in a separate high-yield account. Be intentional about every draw. Track returns obsessively.

Underestimating Personal Guarantees

Back to Bill in that parking lot.

A personal guarantee means if the business can’t pay, creditors bypass the corporate veil entirely. They can come after your home, your brokerage accounts, your savings—everything except (usually) retirement accounts.

Before signing a PG, ask yourself: would I wire this exact amount from my personal savings into this business today, knowing I might never see it again?

Because functionally, you just did.

What most owners don’t realize: almost every business credit card is personally guaranteed. The Amex Gold. The Chase Ink. The Capital One Spark. All the cards you’re running ads through and collecting points on.

That float you’re carrying for cashback rewards? If your business craters, it becomes personal debt overnight.

Audit your total PG exposure across all instruments—credit cards, term loans, lines of credit, equipment financing. Add it up. Look at that number.

Ask if you could survive writing that check.

Using Debt to Mask a Broken Business Model

If your last batch of inventory didn’t throw off enough cash to fund your next PO, that’s not a timing problem. That’s a flashing red light.

Something is broken: margins too thin, CAC too high, expenses bloated, dead stock eating your balance sheet, or you’re pulling too much out of the business.

Borrowing to buy more inventory feels like a solution. It’s not. It’s kicking the can down the road.

When you finally have to face the real issue, you’ll face it while underwater on debt.

Fix the model first. Debt will only compound the problems with a bad business.

Miscalculating the True Cost of Capital

A “10% fee” on a merchant cash advance is NOT 10% interest.

This is where smart owners get destroyed—because the math is designed to confuse you.

Borrow $100K. Pay back $110K. The MCA company calls it a “10% fee.” Your brain hears “10% interest” and thinks: cheaper than most credit cards.

Wrong.

A 10% interest rate means you pay $10K to use $100K for a full year. But MCAs don’t give you a year. They want their money back in 10-20 weeks.

When you run the real math, that ‘friendly’ 10% fee can push 75-100% true APR.

If you’re paying $110K back over 10 weeks, you just paid a full year of interest in two and a half months. That’s closer to 50% APR.

But it’s worse. The payment you make in week one? You only had that money for seven days—but you paid 10% on it. That slice of the loan cost you astronomical rates.

When you run the real math, that “10% fee” can push 75-100% true APR. Sometimes higher.

MCAs aren’t inherently evil. If you’re growing 100% year-over-year and need to float inventory for a proven winner, the speed might be worth it.

But most owners taking MCAs are filling cash gaps and masking margin problems—paying 80% interest without realizing it.

Bill built a free calculator to help you run the real math before signing anything.

Stacking Loans to Stay Afloat

Using one MCA to pay off another is a death spiral.

Each new loan comes at a higher rate, buys less runway, and compounds your hole. I’ve seen owners juggling three or four MCAs, all pulling daily from revenue, slowly (then quickly) strangling the business.

Refinancing expensive short-term debt with cheaper long-term debt CAN make sense. A 5-year term loan replacing an MCA is often a smart trade.

But that requires your business to be healthy enough to qualify—which is rarely the case once you’re in the spiral.

If you’re stacking, you need restructuring, not another loan.

Believing Debt Is Your Only Option

Yes, eCommerce requires more working capital than software or consulting. Inventory is a cash monster.

But heavy debt isn’t inevitable—especially if you run a tight ship.

Higher margins mean less financing needed. Faster inventory turns free up cash. Better supplier terms extend your runway. Organic growth doesn’t require borrowing to fund ads.

Sometimes the right move is making hard decisions—slower growth, cutting costs, killing a product line—instead of borrowing to avoid discomfort.

It’s not easy. It’s not fast. But it builds a (perhaps smaller) business that actually stands on its own.

Resources Worth Bookmarking

If you want to go deeper, Mehtab Bhogal wrote two excellent pieces on this topic:

And again, Bill’s true APR calculator.

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