“Only idiots start businesses with loans.” This is the advice of billionaire Mark Cuban. He’s the owner of the Dallas Mavericks and rarely loses his word.
Cuban makes some good points in interviews, but also misses some in favor of starting a business on loan.The 60-year-old Shark Tank star bought a local bar while in college. I haven’t had to raise money for my business since.
Times have changed and interest rates are different than they were in the 1980s. With $63 billion in cash, he’s even with iPhone giant Apple Inc, and he owes $93 billion in debt.
Borrowing for business is not only no longer risky, it may be the smartest financial move you can make.
Why You Should Consider Taking a Loan to Start Your Business
Cuban points out that people underestimate the effort and time required to run a new business. He argues that most startups fail, which often means owners are personally responsible for their funds, and sometimes at risk of bankruptcy.
That’s a good point, but there’s another aspect of the story he doesn’t mention.
Most start-up businesses fail due to lack of capital, unable to obtain funding to continue operations. More than three-quarters of companies have been running for up to five years before they run out of money because sales can’t keep up with expenses.
So it turns out that taking out a loan might actually keep your business going, instead of ruining it.
Loan interest rate to start a business
Business loans and other types of loans are the cheapest form of debt in terms of interest rates. For example, interest rates on private business loans, which were over 25% in his 80s, have now fallen to an average of 13.4%, and even lower for Small Business Administration-approved loans.
Even a personal loan with an average interest rate of around 14% is less than the cost of starting a business using credit cards or equity financing. Equity financing (partnership or investor ownership of a new company) requires a high expected rate of return. Investors won’t put their money in unless they believe they’ll get double or triple digit returns. Just ask Cuban and fellow sharks.
business and personal loans
Once you understand the cost of different types of business financing, the question usually boils down to either business loans or personal loans.
Business loans almost always offer lower interest rates because the business assets guarantee the money. Lenders can seize or force the sale of business assets to meet loan payments.
This is not the case for personal loans, which do not require collateral. You won’t be forced to sell your home or other assets, and you won’t go bankrupt on personal loans. That peace of mind for borrowers comes at a higher interest cost.
Business loans are also generally much higher amounts. For example, some business loan sites fund small business loans up to $300,000, while most personal loan sites allow him to loan $40,000 on 3 or 5 year terms. I’m here.
There’s probably no single answer to which loan is best for starting a business, but it might be an unnecessary question anyway. Most new businesses are not eligible for business loans.
Minimum Business Loan Requirements
- 12+ months business
- $50,000+ annual turnover
- No personal bankruptcy or tax liens
Business loans may also require personal collateral, so losing your home or other personal property may not always be prevented.
By comparison, personal loans are always unsecured and the money can be used for any purpose. Fees can be high, but most people with a credit her score of 600 or higher can qualify.
Using a Personal Loan to Start a Business
Taking out a personal loan to start a business may be a good financial decision, but there are a few things to keep in mind before borrowing money.
Start your business with as much money as you can save until you at least have a viable business plan and are close to selling. Loan payments start within a month, so you need a way to start paying off using a sold or unused loan.
If the income from your business isn’t growing fast enough, you’ll need to dive into your savings or rush to make payments.
Startup Business Loan Rules #1
Run your business with your own money as much as possible, and only take out loans when a sale is near.
We also recommend using only personal loans for low capital type businesses.The internet ushered in an era of low cost businesses, from Amazon FBA to service websites.
For example, it cost a minimum of $100,000 to start a retail business with manufacturing costs and stores. Now you can start with as little as $5,000 through Amazon or Shopify. So a $10,000 personal loan is enough to get your business started and you can have a cash cushion to make payments while your sales increase.
While this excludes many traditional types of businesses that cost tens of thousands of dollars to start, it is a much safer way to start a business.
Startup Business Loan Rules #2
Loans should only be used for starting a low capital type business that can be started with $30,000 or less.
Finally, make sure you balance your early loan repayments with your business’ cash needs. It’s tempting to push all your cash flow to pay off your loan, but when that cash flow dries up for a few months, problems can arise. In a drought season, you don’t want to be behind on payments, so prepare cash and plan your expected sales for the year.
Startup Business Loan Rules #3
Plan your expected cash needs for the year and have cash ready for loan payments.
How to qualify for a business loan
Eligibility for a personal loan is easy and the application takes less than 3 minutes. Most websites require a minimum credit score and at least part-time employment to qualify, but that’s generally it.
Getting a business loan is more difficult and time consuming. Most business loans take at least 2-3 weeks to be approved and processed. This includes time to review financial statements and bank records.
The minimum requirement for a business loan is usually one year or more in business and current turnover. Getting the best rates means higher sales in the $100,000+ space and more sales from repeatable sources.
Business and personal loans are difficult to obtain, but should still be considered a source of funding. Access more funds. Even a 1% difference in interest rates can result in tens of thousands of savings.
Taking out a loan to start a business can no longer be a negative decision like it used to be. There are good reasons to consider borrowing for startup financing. Even multi-billion dollar companies use debt financing and there are several advantages to using partnerships and investor money. Weigh the pros and cons and buy a business loan to ensure you get the best interest rate.
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