Why you should not take out a business loan!
I am 100% behind anyone who wants to start a business online or otherwise. Business is my passion and I want everyone to experience the same amazing rush I do when something goes to plan.However, as we know, many (not all) businesses need some capital to start, and people who cannot afford to invest themselves will sometimes turn to banks and business loans for the answer.
The truth is, this is not always the case. For people who have a business already that is making money and needs more capital to grow, then a business loan can be an option (although it’s still something that needs to be seriously considered before doing).
However, if you are new to business and starting a new business from scratch, there are a few things to consider before even considering a business loan.
I learnt the hard way that a business loan was not the way forward for me, and in all honesty, it was partly my own fault, I was young and naive. At 19, I thought I knew it all, and I got the chance to purchase a business that was doing pretty well. It was basically importing a product from China and selling it via a website. I was importing this product at a cost of around £6 per unit and retailing them at £35-£40 per unit depending on the model.
I was doing really well, and was really excited. I had taken out a £60,000 business loan to pay for the stock that was associated with the business sale and had made good connections with the manufacturer.The item had a brand name attached to it. I was purchasing from the original manufacturer in China, and he owned the trademark in China, meaning I knew I was purchasing the genuine product.
However, another UK business person was importing the same product. They had some kind of disagreement over shipping times with the manufacturer in China, and so went to another supplier in China and asked them to copy the product including the brand name. This meant that they were buying a product that was fake in China.
They then however, registered the trademark within the UK, unbeknown to the many other sellers of this item. This made our item fake in the UK effectively.
At 19 years old, I knew nothing about brands and trademarks, it’s a lesson I have since learnt and always protect my intellectual property now, however, I was literally told one day to stop selling, and with no income, I was not able to pay the business loan. I sought legal advice and was told they had not registered the brand in good faith, however, it would be very costly to fight, and all of my capital was tied up.
I was (luckily) registered as a limited company, and so, most of the business loan debt went down with the company, however, part of the loan had been secured on my home as collateral. To cut a long story short I ended up losing my home and it resulted two years later in me going bankrupt in an attempt to get back on my feet.
My divorce and bankruptcy came through in the same week! Being positive as ever I saw it as a week of fresh starts rather than failures, but I certainly learned an awful lot between the ages of 19 and 23! But Hey, Richard Branson has been bankrupt!
Anyway, my story is obviously an extreme one, and you probably would never come across this kind of situation yourself, however, there are a few reasons why you should think twice before taking out a business loan to start a business.
Firstly, why would you put this kind of pressure on a new business? You’re instantly putting your new venture into a negative cash flow status. You have to take enough to cover the loan before you have even begun to think about paying yourself or investing into the business.
Secondly, loan repayments will often start immediately. If you have taken the business loan to put into manufacturing costs, then you’re going to have to pay for your loan repayments yourself during the set up phases of your business, so you are also putting a strain on yourself financially in the beginning.
You will be paying interest on a business loan which can be quite high, and this is money that your business is earning could have been invested into the growth of your business rather than paying a bank.
Having a loan over your head can cause a sense of failure. You know that you need to earn x amount to cover the loan, and considering most businesses statistically make a loss in the first three years, this means if you don’t achieve that figure, you are putting an emotional strain on yourself which can cause you to not focus on your business in as positive a way, and as any entrepreneur will tell you, a huge part of success if having the right mindset.
You may end up running a business model that differs from your original plan. Many banks are now putting strict stipulations on the allocation of business loans, and it means that in some cases, they may ask for certain changes in your business plan before they will grant the business loan. This means that you could end up running a business which is nothing at all like your original vision and this could cause you to become complacent with it.
So, what do I suggest?
Well, if you are wanting to start a business, there are other ways of getting capital than a business loan.
My personal preference would be to start a business that would not cost me an awful lot, that I could self fund and then use the profits from this business to invest into the larger business idea.
Yes, this means that it could be a longer time scale to get your idea off the ground, however, it also comes with a sense of achievement that you have built up this business from nothing.
It is difficult to find ways to make money when you don’t have a lot of capital, but there is always something you can invest your time or little bit of cash into and bring a return.
I have a free video course that teaches you some of the methods I have used to make money in the past with zero capital. You can enrol on the course by clicking here.
You also could look into going into business with a business partner. If you can find someone who has some money they are looking to invest (and there are websites out there) and is willing to work with you as a partner, then you are not only widening your skill set, contacts and knowledge between the two of you, but you know that that person will have the business in mind when it comes to future decisions as they have a stake in it, whereas a bank is simply interested in getting back their money.
Please leave a comment below with any questions you have!
Please subscribe below to get regular updates of my blog posts:
Subscribe Via Email
Subscribe Via YouTube
Follow me on Facebook