I just talked to a business owner the other day who has grown her startup nicely - 15% a year or so - up to revenue of a bit over $2.5MM. Now, (in the service business,) the venture is at the point where she could accelerate its growth. Through managing expenses and getting paid for added value, the business has some positive cash flow. This "borrowing power" can be used to generate cash - once. But that cash has to be used to grow cash flow faster - much faster - than the payments due to the bank.
New equipment? Expanded service force? New salespeople? Nope.
She wants to triple her current occupancy costs and build a new building. There may be some efficiencies to be gained, but at a huge cost. If the company is 15% EBIT, Every $1 in new debt obligations has to be supported by $6.60 in new revenue. If occupancy costs, as an example, go from $45,000 to $135,000, that's almost $600,000 in new sales - just to stay even with the business as it is today. (On revenue of $2.5MM, that's a 24% increase just to pay the bank.)
Is this really the best use of the business's borrowing power?