Taking a Loan vs Saving to Start Up a Business

by Krantcents · 11 comments

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Starting your own business is the dream of entrepreneurs all across the world. Everyone talks and considers starting their own business, but it takes serious guts to actually go out and do it. There are so many things that can potentially go wrong, and the fear of failure scares some from the potential success. There are countless different ways to fund your business, such as taking a loan, or saving up. It’s important to weigh the positives and negatives of each.

Think about all of the businesses you come in contact with on a daily basis. Nearly every Fortune 500 company in existence today was at one point just an idea in a single person’s head. Some businesses might require hundreds of people to get off the ground but others like Apple were started by two guys in a garage.

One thing nearly all new businesses will have in common though is their constant battle with capital. No matter how successful a business becomes or how big it gets, there will always be shareholders demanding more money or employees looking for more benefits. Starting a business is no different, and obtaining capital is often the biggest hurdle to getting a business off the ground. So what’s the best way to fund your small business?

Taking a Loan to Start Up a Business

The nice part about taking a loan to start your business is that you won’t have to risk any of your own money. But don’t think that banks are just willing to lend out money to anyone for any reason. You’ll need to present a compelling business plan and provide some type of collateral. Banks know that small business lending is riskier than traditional loans like mortgages and auto loans so they charge a premium for that additional risk.

You can expect to pay double or even triple the going rates for mortgages if you’re able to secure a loan. And in order to minimize your personal liability, you’ll want to consider forming an LLC or corporation (for small businesses, form an S-Corporation, not a C-Corporation). That way, you won’t be responsible for debts incurred by your business. There are still some things you can be personally responsible for though (even if you do form an LLC) so it would be wise to consult with a tax professional. The National Association of Tax Professionals’ website at natptax.com is a good reference for finding a qualified representative in your area.

The last thing to consider when taking a loan to fund your business is how much money you want to borrow. It’s often a lot easier to get one large loan rather than several smaller ones so make sure that you conservatively calculate your operating expenses. According to debtconsolidation.com, most businesses don’t even make a profit for the first two years so it’s important that the amount you borrow will cover your monthly expenses until you’re turning a profit.

Saving to Start Up a Business

If you don’t have the credit to get a business loan or you just don’t feel like dealing with the bureaucracy of a bank, you can always save the money yourself. The main benefit to starting a business with savings is that you won’t ever have to make monthly interest payments to a bank. That will actually reduce your monthly operating expenses and enable you to turn a profit much quicker.

There are some drawbacks to this option though. Unless you have a large source of income, it could take some time to save up enough to start your business. And as the saying goes, “time is money!”  By the time you’ve saved enough money, there could be competition that’s got a head start on your new business or the market might not be what it used to be for your product or service.

Comparing the Two Options

Generally, saving to start a business is considered the safe and easy route. Although there’s obviously risk either way, defaulting on a loan could have long-lasting negative effects on your ability to borrow with tools as simple as a credit card. Whereas if you were to lose all your personal savings, you’d be pretty disappointed but you wouldn’t have creditors coming after you and people banging on your door for the money you owe them. There is also the possible risk of bankruptcy that cannot be ignored. If you borrow far more than your means and you quit your regular job you will have no source of income to pay it off. The risks are real, and you should really consider the state that you live in as some are very favorable (let you keep your primary home), while others will take away everything.

Ultimately, you should assess your personal situation and determine which option is best for you. If you’re willing to take on the risk, a business loan will enable you to get off the ground ASAP but the interest payments could make up a significant portion of your monthly expenses. It’s generally considered to be true that the more risk that you take the higher your potential rewards can be. But do not make an assumption that you should uselessly risk your money, everything should begin with a solid business plan that is well thought out in every aspect. You can look up at sba.gov on how to create your own business plan from scratch. This will ensure that you have a solid roadmap for years to come, will have a strategy to prepare for the unexpected, and have the highest percentage chance of success.

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About The Author

My name is Dona, I’ve always been hard working, but lived a rather unexceptional life until I decided to get up and go. I quit my job, and started my own business. It was difficult and time consuming, but the hard work paid off, and I feel it’s the greatest accomplishment I ever made.

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