4 Reasons Why You Should Not Start Up Your Small Business With a Loan

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It is everybody’s dream to become self employed and then determine the pace at which he works and also depend less on someone else for monthly or weekly pay. But starting a small business can sometimes be daunting due to non-availability of fund.

The absence of fund can be so challenging to those who hope to become financially independent, and can also kill one’s dream completely. When faced with this kind of situation the main thing that comes to one’s mind is to look for where to get some money in form of loan to enable one achieve one’s dream.

Sources of getting this start up money could be from bank, finance homes, friends, money lenders, etc. While some have successfully managed theirs to actualize their dreams, others have ended up in debts, pains and sometimes jail.

The fact remains that the individual needs money badly but the money is not available. Should you give up your dreams completely because you can’t figure a way to achieve it? Should you go ahead and borrow not minding the risk? Should you think of other things to do until you are able to make enough savings? The choice is yours anyway!

However, if you must consider getting a loan of any kind, whether from financial institutions or from individuals, you must consider the following before going ahead to do so:

1. Interest rate: What is the interest rate on the money you are borrowing? If the interest is in the double digits then you may need to have a rethink because an exorbitant interest rate is going to be difficult for you to pay back especially considering the fact your business is just starting up and that you are yet to get customers. You may just end up using all your profits to service the loan and also dip hands into the capital. This may end up destroying the business.

2. Repayment period: Is the loan going to be repaid within a short term or on a long term? If you go for a loan with over 10% interest rate and you are asked to repay it in less than 6 months, how do you hope to meet up? If the period of repayment is too short the tendency is that you may not meet up. But getting one that allows you to pay back over a fairly long period should be welcome.

3. Collateral: What is being demanded as the collateral for the loan? If you are asked to use your house for collateral what happens in the event that you are unable to pay back at the stipulated time? That automatically means you will be homeless. If you use your share certificates as collateral it also means you would lose all your life investment in the event you are unable to pay back the money. If you must seek one then you need to get from a source that should not demand for collateral.

4. Expected profit: What is your projected profit? Taking a loan whose interest rate far outweighs your expected profit margin would definitely put you at a risk of not being able to pay back at the end. You must have something left for you to be able to continue running the business after paying back your loan.

Borrowing is not completely a bad idea but you have to weigh the pros and cons before making up your mind on what to do. Remember that the essence of the loan must not be defeated by any form of obnoxious clauses in your loan terms.

You may love to read:
1. 13 Areas Where You Can Invest and Make Money as a Small Business (part 1)
2. 13 Areas Where You Can Invest and Make Money as a Small Business (part 2)
3. 10 Reasons Why Aliko Dangote is the Richest African


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