Should you Borrow Money to Start a Business?

If you are starting your own business then you may find that they will be a lot of costs. It all depends on what you are doing but you will need to think about a website and marketing or most businesses and then some will need stock, premises, staff and other things as well. Even a small business providing a service will have some start-up costs and a larger retailer or wholesaler will have a lot more. You may feel that the only way to get started is to get a business loan, but is this the right answer and is it worth the risk?

You may be in a situation where you cannot start your business until you have the cash to do so. This could be a smallish amount and it may be wise to take a bit of time to save up while you are finalising your business ideas and not borrow money. This is because if you do borrow money you will start with extra expenses that you may be better off without. You will have loan repayments to have to make as well as all of the other spending commitments that go with running a business. Loans are expensive as well and so you will have that additional cost on top of everything else. It is worth thinking about how you think that you will manage those loan repayments on top of all of your other business costs and whether it is worth waiting a while to start the business while you save up the money that you need so that you can avoid having that debt to pay off in the future as well as the additional cost.

The above idea could work if you do not need that much money and you know that you will be able to save up for it in a few months or a year. However, if you feel that you have no way of saving up enough money and cannot start the business without a loan, then you may have no choice but to borrow. You will need to put together a business plan for the lender, so that they can decide whether they think that they wish to invest in your business. This will also help you to look ahead and think about how you expect it to do and what money you expect to come in. You need to be realistic though. Not only will the lender be experienced enough to see through overly optimistic business plans, you need to be fair to yourself as well. You need to accept that you may not be able to pay yourself for a long time and that there may be more costs than you expect and less income. Although this may seem rather pessimistic and not the positive approach that is needed for a successful business, it can be wise to plan for the worst. By all means expect the best, but if you have a plan if things do not go as expected, you will be able to be confident that you can cope. Consider what might happen if the business does not make enough to cover costs and whether you will have some money that you can fall back on to help you out. If you have another earner in your household they may be able to help you out but if everyone is invested in the business then it could make things very difficult.

So when you are considering whether to borrow money you need to decide firstly whether you really need it or can manage without it. Then you need to consider whether you can afford the repayments. Try to think about what might happen if the business does not make enough money to cover the cost and how you will manage. It is worth thinking beyond your business plan and imagining what could happen in the worst case scenario and how you might cope, to make sure that you have plans for this as well. It is worth remembering that borrowing money is a risk and even if it is a business loan you will still be responsible for paying it back even if the business goes bankrupt.

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