Here’s Why You Shouldn’t Take Out A Loan To Start A Business

So you’ve got this great idea for a business in your head, perhaps you’ve been thinking about this for sometime, you’ve had enough of your day job and want to make the jump, problem is you haven’t got the money for it. You start thinking… “Should I take out a loan to start my business?”

The answer is no. The problem with starting a business with a loan is that you’re already starting on the back-foot. Quite often when people try to take out a loan to start a business, it’s because they’re unaware of how difficult it is to grow a business. Building a business requires hard work and consistency, starting off with a loan bypasses all of the valuable lessons you need as an entrepreneur to build a long-term, successful business.

World-renowned entrepreneur, Mark Cuban, once said that anyone who starts a business with a loan is a “Moron”. Mark went on to point out that there are dozens of uncertainties in running a business, with the one certainty being that you’ll have to pay back your loan, and I couldn’t agree more.

Starting your first business with a loan is just one small part of what I consider as the biggest mistake you can make in business, are you making the rest of these mistakes as an entrepreneur? Find out here in this post.

Consider the obvious

The biggest question you have to ask yourself first off, is that if the business doesn’t work out – can you afford to pay the loan? If not then that’s even more justification for you not taking one out in the first place.

It’s always easy to think “oh but this idea will definitely work”, trust me… most, if not all, entrepreneurs have been there. You’ve just got to be patient and understand that you simply can’t afford it right now.

Here’s how loans almost killed me

The reason I write this post is because I personally took out a loan to start one of my earlier business ideas. At the time I was confident that I could pull the business off, and I still am, however not long after I took out that loan – I suddenly became seriously ill.

At the time I was still working my office job, in a position to more than comfortably cover my monthly loan payments, however that soon changed as I had to resign due to my poor health. What was once a comfortable loan quickly became a painful grip around my neck, I could no longer afford to repay the monthly fees and I nose-dived into my overdrafts.

One unforeseen event forced me into a position where I had to ditch my initial business idea, in order to just survive. It can happen to anyone. Don’t make the same mistake I did!

Should I get an Investor?

As an alternative to taking out a business loan, you might consider taking on an investor instead. Again I would advise against it, for similar reasons already mentioned.

When taking on an investor at the startup (a.k.a. Seed funding) level, purely for financial reasons, you’re already cutting your business in up to half before you’ve even made any income from it.

Again you need to first prove to yourself that you can run a successful business, even at a small-scale, before you take on huge financial commitments like a loan or investor. Not least because it will teach you valuable skills and experiences that you can use in all of your future business endeavours.

Borrowing from friends or family

There is an alternative option, which is to borrow money from your friends or family. This option is far safer than borrowing from a bank or loan company, as they won’t repossess your belongings, but at the same time carries the same pressure of having to repay your borrowings.

Much like taking out a loan, you need to be absolutely certain that you can repay the loans. That certainty comes from having a proven track record at building businesses. There is a new-found pressure of not being able to pay your friends or family back, which has the potential to destroy relationships, it’s worth considering that before asking your parents for their investment.

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What should I do instead?

“Should I use my own money to start a business?”… Yes!

Most businesses don’t require much capital to start, and a majority of those businesses are service-related. If you’ve got something that you’re passionate about, then figure out if you can make money from it.

There are plenty of businesses that you can start for next to nothing, this can include blogging, vlogging, flipping or coaching. The truth is that you don’t have to create the next-big thing, it’s easy to look at Facebook or Uber and think “I need to think of something that’s going to change the world”, but in reality you don’t have to re-invent the wheel. Pick an existing business model that works and keep working at it every day.

Wondering how to grow a service-based business? Check out Gary Vaynerchuk’s $1.80 Strategy here for a great organic way to pick up new clients.

Once you’ve built a successful business, THEN you can personally fund your initial business idea that you wanted to get that loan for, in fact by that time you might then realise that your original idea was either highly unrealistic, no longer a passion of yours or just plain sucked.

Should I quit my job?

If you’re really unhappy with your job, and it continuously adds stress to your life, then yes you should consider quitting your job, however, if you want to quit your job purely because you want to live that entrepreneur lifestyle then I suggest you hold on a second.

Being a business owner is tough, it requires a lot of hard work, time & sacrifice. Not everyone has the confidence or passion needed to sell their business (and themselves) on a day-to-day basis, so it can be quite the risk to drop your secure income and start from scratch.

If your job makes you miserable then consider finding a different company or industry that you can work for, you can then build up a new side-hustle business whilst you continue to bring in secure income from your 9 to 5.

Should you ever take out a business loan?

It’s not always a bad idea to take out a loan, however this should be done when you’ve established a proven track record of sales and when your business is thriving. For instance It can be a good idea to take out a loan when you’re struggling to meet demand and need to increase your productivity, by investing in improved machinery or software.

To clarify, it’s fine to take out a loan when business is a sure-thing. It’s also a massive benefit when the purpose of the loan has something to show for it, for instance if I spend £5,000 on marketing then that’s gone after a few months, whereas if I spend the money on improved machinery then that will last me for years to come.

Conclusion

If you’re wondering whether you should take out a loan to start a business, then you might want to reconsider other options first before putting yourself under such financial stress. There are many uncertainties in business except for the fact that you’ll have to pay back the loan regardless.

There are plenty of businesses that you can start with next to no capital, and I believe that there’s a business model out there for everyone. Don’t take ‘shortcuts’ by taking out a loan. Instead, prove to yourself that you can run a successful business first before you take on additional financial commitments.

What are your thoughts? I’d love to get your feedback in the comments below

Should I Take Out A Loan To Start A Business - Here's Why You Shouldn't - Mikewalterz
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