A common question here at the Small Business Development Center from our business owners: Should I borrow money to start my business? And would doing so help or hurt their chances of success?
Here is the reality of starting a small business with borrowed money — this type of money is usually scarce, costs are relatively high and the competition is significant. Small business loans are not simple to get because of the preparation that is required. There is always a list of qualifications to meet, such as equity requirements, collateral, business plan, profit and cash flow projections, personal financial statements and what seems to be a ton of other loan application information.
If you take all of the people who would like a small business loan – most of them will not even apply because once they know all the requirements or won’t go to the trouble to try – few will succeed. Of those that decide to apply for a new start-up loan, many of them will become discouraged because they didn’t realize it would take so much effort or find they do not have the minimum qualifications.
Even more important than the loan process is the debt you would put on your new business. Consider that the customers you seek to serve are currently getting their needs met elsewhere. You want them to change their ways of buying from your competitor to start buying from you. To do this, you have to spend money to get your business up and running, spend more on advertising and promotion to let them know of your very existence, and wait out the “start-up” time until they find you and the revenues start flowing. So, you are spending more than your competitor and are taking in less revenue.
This is the picture without debt. If you add debt, you now have the interest expense plus principle to pay. It is difficult enough starting up a business without this burden. The debt makes it more difficult not only because of the payments you have to make, but if you falter, you can potentially lose everything. To get the debt in the first place, you typically have to pledge everything you have in your business—and probably your personal assets as well.
Try to start your business with as little borrowing as possible, and none if you can do it. If you borrow most of the money the business needs (meaning you are providing little of it) your chances of success are much reduced. Your chances of losing a great deal are substantial. You are better advised to start as small as possible and let the business grow the cash flow that will allow your expansion, at least for the first couple of years. Once established, the chances of getting a loan are greatly enhanced and the business is in a much stronger position to service the debt of an expansion loan.