So, you have decided you want to start a business. Great!
You know what kind of business you want to start, you have set goals for your business and made a plan of how you will achieve them, but there’s one thing missing…
Start up capital.
Unfortunately, the majority of businesses take some kind of capital to start up. Even if it’s just to have a website built or purchase some initial stock.
When you first start out on your journey, you probably have no credentials and no references for a supplier to take a chance with you on a credit basis, and so the only option is to have some funds up front.
This is where some people begin to toy with the ever romantic idea of a business loan.
Now, I am not dead set against the idea of business loans per se. If you already have an established business and you’re looking for capital to grow, then that is a different situation all together. However, I feel that if you are just starting out in a new business, the last thing you want to do is to tie yourself up with a business loan.
Why? Well here’s why…
Reason #1: Restrictions
The application process for a business loan can be a trying one. Credit checks, endless forms, appointments with the bank, business plans, it’s just exhausting! And even when you have jumped through all these hoops, they can apply restrictions to your business.
What I mean by this is that it isn’t unheard of for a bank to say you have to do something a certain way, or change an aspect of your business plan in order for them to give you the loan.
This can mean that you end up running a business that isn’t your original vision, and while this is not a complete disaster, it could cause some inner resentment towards your business.
Reason #2: Repayments/Interest
This is probably one of the biggest reasons I would not take out a business loan.
You are literally putting your business into negative cash flow from day one!
Interest rates can be quite high on business loans, so you will have a substantial regular monthly outgoing from the very first month you launch your business.
Now bear in mind, most businesses make a loss for the first three years, so you need to think about if you could afford to keep up the repayments on the business loan until your business’ revenue could cover them. Would this business loan repayment be the difference between your business closing and continuing to push through the initial difficult stage that most businesses experience?
This means that a business loan repayment could have a detrimental effect on your personal finances as well as your business finances (and trust me, I learnt this the hard way.)
Reason #3: Emotional Impact
By putting more pressure on your new business and therefore on yourself, your focus becomes on making money to cover expenses, rather than nurturing the new business. (On a side note making money should never be your first focus in business; it should be providing a quality service or product.)
This can affect you emotionally.
It causes stress and pressure, but worse than that, if you’re in the position where you are struggling to pay a repayment, it can cause a sense of failure.
This sense of failure can cause problems for entrepreneurs. As a huge part of being successful in business is attributed to mindset, and if you are taken out of that right mindset it can have a negative effect on your business.
You can start to lose interest in the business and lose your vision that you worked so hard to create.
Unfortunately, I learned these lessons the hard way. Taking out a business loan is a huge regret for me, and it caused me to lose not only my business but my home too. However, I learnt from the experience and can now share it with other people, and luckily, I recovered from the ordeal as a stronger and more knowledgeable person.
So what are the alternatives?
If you are keen to start a business but have no starting capital, then there are some alternative options rather than taking out a business loan.
Firstly, have you considered starting off with a business that doesn’t require much capital that you could perhaps self fund? This will allow you to earn some money and then invest your earnings into the larger idea. Always my preferred option!
Secondly, think about taking on a business partner. There will be people out there who want to partner into a business but don’t have experience in business, but do have capital. Discuss an equal partnership. You can often find these people on message boards and forums. They will probably even bring their own set of skills to the table!
Lastly, if you are adamant on taking out a business loan, then consider purchasing an established business.
There are many sites where people list established businesses for sale, and if you can find one in the area you’re looking to work in, then this may be an option for you, because with an established business, you will be able to ask for accounts and be sure that the loan repayments would be covered before taking out the loan.
Don't miss a post!
Join our mailing list to receive the latest articles, tips, tricks and advice straight to your inbox!
Thank you for signing up!
Stacey is the founder of Tycoon Factory, a website aimed to support and encourage ‘interpreneurs’ in their online business journey.