If you’re thinking about borrowing money to start a business, I challenge you to think again!
These days, more and more people are turning to entrepreneurship to make their living, and I couldn’t be more excited about it.
Starting your own business can change your life in many ways for the better. It has the potential to provide you with more freedom, financial stability, and control over your life.
The only problem is, very few business owners ever get to experience these benefits.
Because they saddle themselves with the crushing burden of debt right from the start.
In many cases, their businesses actually turn into a source of extreme stress and anxiety.
It breaks my heart!
So, before you dive head-first into debt as a way to fund your next venture, I urge you to consider these 7 reasons why borrowing money to start a business is a bad idea.
Reason #1: It Adds Risk To Your Brand New Business
When you start a new business, there’s no guarantee that it will be successful.
At its heart, entrepreneurship always involves some level of risk. In fact, I believe that’s part of the appeal.
You have to put in a lot of effort, time, hard work, and, in most cases, money if you want your business to be successful.
But here’s the thing, the moment you add debt to the equation, your risk goes way up.
For one, you’re pulling money from your future profit.
But beyond that, if your business doesn’t generate enough revenue to cover the payments on that loan, or worse, your business goes under, those debt payments don’t go away.
In other words, whether your business continues to exist or not, you’ll still have to pay it off!
If you’re unable to pay back what you owe, you’ll start to accrue interest on your loan.
As a result, you’ll be digging yourself into a deeper and deeper hole until you’re able to pay off your debts. This can lead to things like bankruptcy, repossession, and on a more personal level, stress on your relationships.
It’s never worth it to take big financial risks for the sake of a brand new business.
The early days of entrepreneurship come with enough uncertainty. So, don’t make your life harder by digging yourself into a financial hole.
Here at Be The Budget, we love entrepreneurship! In fact, if you’re interested in starting a business, be sure to check out some of our other related posts:
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Reason #2: You’re Starting Off In A Financial Hole
As an entrepreneur, you have to start from zero and work your way up.
But when you borrow money to fund your business, you’re not just starting from zero – you’re starting out in the negative.
Remember, the entire point of starting a business is to earn a profit.
And by starting in a financial hole (i.e., borrowing money), you are harming your business’s profitability.
Let me put it another way.
One of the most exciting aspects of owning a business is witnessing the positive results of all your hard work.
As you start landing clients or selling products and earning money, you’ll build momentum. You’ll also receive boosts in motivation as you watch the numbers in your bank account go up.
Borrowing money to start a business deprives you of this excitement and motivation.
After all, it’s hard to celebrate new revenue when you’re buried in debt payments.
Businesses built on borrowed money typically take longer to turn a profit because paying off debt becomes the number one financial priority.
This can be highly demotivating since it’s difficult to continue putting so much work into a project that isn’t paying you.
It’s like running a race and volunteering to start 100 feet behind your competition. It’s not only unnecessary, it’s detrimental to your ultimate success.
Reason #3: It Reduces The Need For Creativity
When a caterpillar goes through the process of transforming into a butterfly, there is a long period of time in which it’s stuck inside a dark, tightly rolled cocoon. When, at long last, it’s ready to fly, the butterfly struggles to break free from the cocoon.
This struggle is absolutely vital to the butterfly’s survival. If someone were to cut the cocoon open and let the butterfly loose, its wings would not be strong enough to fly, and it would die soon after being set free.
Its struggle is essential for its survival.
The same is often true of starting a business – the initial struggles business owners face usually offer important lessons that are vital to the business’s long-term success.
Loans are enticing because they seem, at face value, like shortcuts.
But, in reality, they are just like the knife that cuts open the butterfly’s cocoon. They deprive you of the struggle, and by extension, the creativity and valuable experience required to build a business that will last.
When you’re just starting a business, financial limitations are a good thing.
They force you to get creative and work out the kinks in your business model. The ingenuity you develop in your early days of business could end up being what ultimately makes you a successful business owner.
So, while the shortcut may seem enticing, remember that they come with real tradeoffs. If the longevity of your business is important to you, it’s better to get scrappy and work with the resources you already have at your disposal.
Seriously, you shouldn’t be focused on selling a bank on the idea of loaning you money. Rather, you should be focused on making your first few sales.
Reason #4: You’ll Have To Pay Interest
One of the biggest reasons why borrowing money to start a business is a bad idea is that you’ll have to pay interest on your loan. Borrowing money isn’t free!
The average interest rate on small business loans is currently between 3 and 7 percent, and some lenders have interest rates much higher than that.
Therefore, if you take out a loan, you’ll end up having to pay back much more than you initially borrowed.
Just like making any other purchase, paying in cash is always a better idea than spending money you don’t have. The longer you take to repay a loan, the deeper you’ll be digging yourself into a financial hole.
If you can make do with what you have or save up to start your business, you won’t owe the bank anything.
And as a business owner, the less you owe, the more freedom you’ll have!
Reason #5: It Adds Unnecessary Stress To Your Life
Borrowing money to start a business, at first glance, might seem like a great way to hit the ground running.
But here’s the thing, if you try to run before you can walk (or even crawl, for that matter), things can spiral out of control quickly!
And the more you lose control, the more stress you will feel.
You see, debt tends to induce many emotional effects in people, and one of the primary emotions felt by people in debt is stress.
In fact, about 40% of people who have had credit card debt said it affected their general happiness.
As any seasoned entrepreneur will tell you, starting and scaling a business comes with its fair share of stress.
It’s a mental game.
Each day brings new challenges, and a strong, healthy state of mind is essential if you want to be able to tackle those challenges head-on.
For this reason, the more stress you can mitigate, the better.
Aside from turning a profit, there are probably a few other reasons you want to start a business. Perhaps you view entrepreneurship as a way to make a positive difference in the world. Or, maybe you’re motivated by the idea of being your own boss and having the freedom to choose your day-to-day activities.
Well, if you borrow money to start a business, you take yourself out of the driver’s seat. Because, until you pay off your loan, the bank is your new boss.
Reason #6: It Destroys Your Cash Flow
As you get your business going, you’ll start learning to manage your cash flow. The revenue you earn from your products and services will cover a range of expenses, including:
- Operating expenses
- Investment back into your business
- Retained earnings
- Other miscellaneous expenses
Not all of the money your business makes goes straight into your pocket.
A financially healthy business is one that is able to pay you well, sustain day-to-day operational expenses, and set you (and your employees) up for a strong future.
However, if you borrow money to start your business, a huge portion of your cash flow must automatically go straight to repaying your loan.
Paying off your loan will become your number one priority to avoid accruing interest or late payment fees. As a result, you won’t have as much money to distribute to other, more important, areas of your business.
Think of it this way; many people start businesses because they dream of no longer having to live paycheck-to-paycheck.
But the moment you have to funnel all of your earnings toward paying off a business loan, you’ll have recreated this scenario in your own business, making it even more challenging for you to get your head above water.
Reason #7: It Limits Your Maneuverability
As an entrepreneur, it can be hard to see a clear picture of how your business will look five to ten years down the line.
That’s why one of the greatest assets you can have as a business owner is the ability to pivot and make changes as you discover new market needs.
In fact, most successful businesses are ever-evolving. In other words, they adapt as their niche becomes clearer or the demand for certain services increases.
Unfortunately, when you borrow money, you limit your cash flow, and thus, you
limit your ability to maneuver quickly and adapt to changing market trends.
Put simply, having the freedom and flexibility to pivot is essential if you want to create a healthy, thriving business. Therefore, don’t limit your ability to grow and change from the outset by borrowing money to start a business.
We get it–you’re eager to start your business, and you don’t want to have to wait any longer. But having the patience to start your business on solid, debt-free footing is crucial for your long-term success.
Rather than borrowing money to start a business, consider revising your startup plan so that it fits within your existing budget.
Additionally, set a monetary goal and use your desire to start a business as motivation to save up all the capital you need.
Remember, if you don’t have enough money to start your dream business now, that doesn’t mean you have to give up. Rather, as an entrepreneur, it’s your job to find a way–even when the odds are against you.
Just keep working toward your goal of launching a business the financially responsible way, and it will pay off immensely in the long run.