TO TAKE OR NOT TO TAKE OUT A LOAN FOR A BUSINESS?
Starting a business is always an investment: effort, time, money. And the question of money is often the most pressing issue for aspiring entrepreneurs. Is it worth using borrowed funds as start-up capital? This question worries all businessmen, whose projects require significant financial investments at the very beginning. Financial consultant Eldar Umbatov helps to deal with this issue.
Are you an entrepreneur starting or already having work experience? Are they registered as individual entrepreneurs or formalized their relations with the state as a self-employed citizen? Or are you just planning to start your own business and are taking the first steps in this direction?
Money is one of the motives that prompted you to get into the business. Money is the blood of business! As rude as it sounds. Can the human body function without blood? Not!
Without money, any business turns into a hobby.
But is it worth attracting outside, other people’s money to your business? A loan for one’s own business is like injecting donated blood into the body. If we draw an analogy, transfusion of donated blood is advisable in the amount of 20-30% of a person’s own blood. In exceptional cases, up to half of the volume is poured. No more! So it is in business – you must have your own money!
This can be your savings, a gift from parents (children), relatives, relatives, friends, and so on.
This should be the money that you can conditionally “forget” about for a while. For what? Maybe a month, maybe a year or a few years. Or maybe forever. Yes, it also happens: business does not go – money is lost.
It is unacceptable to run a business entirely with someone else’s credit money!
Hence the rule number 1: there should be only a part of credit money in your business!
FOR WHAT PURPOSES YOU SHOULD NOT BORROW MONEY
Entrepreneurs make mistakes in trying to do what’s best. Unfortunately, often “the best is the enemy of the good.” Therefore, the purchase of expensive office furniture, office equipment, especially with credit money, can seriously undermine the financial position of a young business.
It is also not worth investing (both with your own and with credit) in the purchase of production equipment at the start of the project.
The first batches of products can be outsourced – to negotiate with already operating industries. Yes, the cost of such products will be higher than those produced on our own equipment. You can simply “probe” the market – how it will perceive your product. If it is met with a bang by the market, then by purchasing your own equipment in the future, you will reduce the cost. But if your product does not cause delight, then the loss will be small, and you will not have to sell unnecessary equipment for cheap.
Rule number 2: take a loan for the purchase of only that equipment, in the efficiency and necessity of which for the business you are already 100% convinced.
WILL THE LOAN BRING PROFIT TO YOUR BUSINESS?
The mechanical attraction of borrowed funds to business never guarantees profit to anyone!
How to understand if your business has growth potential that is not being realized at all or is being poorly realized? Evaluate the profitability of your business, and you will understand whether there is an additional, unused resource inside or without third-party financial injections, you will not be able to develop further.
Business profitability (ROE) can be calculated using the formula:
ROE = (profit before taxes / equity) x 100, expressed as a percentage.
For example, the profit for the year was received by 1 million rubles, and at the beginning of the year, 2 million 500 thousand rubles were invested. ROE of your business will be 40%.
Have you thought of taking a loan? Consider the payment of interest on them together with the payment of taxes. In this case, the profit should increase! Plan immediately how much you expect to increase your profits.
If it turns out that the profitability of your business decreases with the attraction of loans, then you are using your own money ineffectively, and the credit resources will be harmful to your own assets.
Rule # 3: loans should increase your bottom line.
WHEN IN NO CASE CAN YOU BORROW MONEY
If your entrepreneurial activity does not give you any income for a long period (months, years), and you have invested both your money and the money of your loved ones to no avail, in this case, it is absolutely impossible to get involved in credit adventures! Think and decide what you are doing wrong?
The unit economy formula will help in this – the calculation of profit (loss) per client. You can independently calculate the indicators of your business.
Unit economics shows the real situation in your business and allows you to understand if there is a financial sense in your business. This will help determine the next steps: if everything is very bad, then liquidate the business without delay, or urgently make drastic changes to it, without which it will remain a devourer of your time, nerves and money.
Rule number 4: you cannot take out a loan if the calculations show a loss-making model of your business.
WHEN IS THERE NO WAY WITHOUT A LOAN?
This has already been partially said above: if everything is fine in terms of unit economics, orders are growing with the number of customers, and you urgently need to scale (expand) your business, then it would be unreasonable to miss such a chance without using borrowed funds. Even if you are personally willing to be content with little, competitors will take advantage of your chance, eventually luring your customers to themselves.
Some product is on sale well – feel free to buy it from the supplier. When one of the coat models sold in my online store began to be in high demand and several orders were received for it every day, I bought the most popular sizes remaining from the supplier – I took out a loan for this. I acted wisely: the season was just beginning. At the very height of the season, we managed to sell the entire purchased batch with a good profit!
It is necessary to take a loan only if the profit received from the loan money will exceed the amount of interest paid for this loan. For example, from borrowed 100 thousand rubles. you must earn at least 20% per annum to cover the interest on the loan.
You also need to prepare yourself for the expansion of your business: if your advertising campaign “shoots”, then the increase in the number of customers should not take you by surprise.
Will you be able to provide everyone who comes to you with worthy attention and service corresponding to the request? If you produce something – do you have enough resources and production capacity to increase the volume of production? If you are trading, do you have enough inventory? If you provide services, are you enough for all clients? Without preparation, you risk undermining your reputation.
Rule number 5: a loan should be taken for a prepared expansion of your business with an already worked out business model and clear prospects.
FROM WHOM AND WHERE TO BORROW MONEY?
The answer is simple – who will agree to lend you money and offer the most favorable conditions for you!
The ideal option is an interest-free loan. It is best to take money from family and friends, who will lend you money without any interest. But agree in advance, explain for what purposes you take the money. Take only those amounts that your loved ones do not mind losing. Credit is always a risk!
Otherwise, without explaining at first, you will not only lose good relations with loved ones, but also make blood enemies in their person.
Try to take a grant for your business from various state and non-state funds to support small businesses.
Take advantage of bank credit programs for small businesses. Use the opportunity and negotiate with the suppliers of goods on a delay in payment for products, or take the goods for sale with the condition that the remainder of the goods is returned to the supplier. It can also be interest-free lending. If you are renting premises for your business, then try to find a common language with the landlord – no one has canceled the “time is money” formula, and every day of using other people’s money also has a price.
What absolutely must not be done is to take a loan from an MFO (microfinance organization).
Also, you should not take consumer loans from banks for your business, since the interest on them is also always higher.
Rule number 6: take a loan where it is most profitable. Ideal – no interest paid.
A loan is an additional debt burden on the shoulders of you and your business. Before you load it on yourself, think about whether you can handle this burden.
Once I myself found myself in a difficult situation. At the dawn of his entrepreneurial activity, he purchased products abroad under a contract. The deliveries were made by sea containers. The delivery time was 2-3 months. The products were successfully sold. But after the next innovations of our regulators, the entire distribution chain was disrupted: small wholesalers who bought imported products from me disappeared.
What to do? The containers were on the way – they walked and walked, and it was already impossible to stop the supply process. Warehouses were packed to capacity, additional storage facilities had to be rented to unload newly arriving containers. You also had to pay for this product! I had to get into loans. Yes, I had a difficult time then – it got to the point that pocket money had to be borrowed from friends and relatives.
The situation was eventually successfully resolved, but I have forever mastered much of the above: what can be done and what cannot. And that you need to carefully calculate your risks.
The loan should increase the efficiency of the business and accelerate its growth. Otherwise, you risk becoming not an entrepreneur, but a philanthropist, on which banks, landlords, suppliers, government and fiscal authorities, and so on, will profit. Everyone will profit but you.
It is not for nothing that the people created the wisdom: “You take someone else’s money for a while, and you give yours and forever.”