Should you take a loan to start a business?

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For anyone who has ever thought of starting a business, there are usually very many things to consider before moving ahead with the big decision. One of those key decisions is “Source of Capital”.

Once you have identified a need in your community or any pain point whatsoever that you wish to solve for your potential customers, then You ask yourself, ‘Where are my getting the capital to start this business?’- Big question!

And of course there are many answers to this question; you’ve got many alternatives; personal savings, grants from family, friends or even angel investors. You could as well raise cash from the venture capitalists if you’re lucky and also have a profound plan convincing enough to receive funds at an idea stage. But what if your mind runs to the option of running to the bank for a loan?

Should you take loan from the bank or a lender to start your business?

The answer is NO!...at least from me.

Why do I say no? I have found that the process of starting a business in itself is stressful enough even if you’ve got free capital or using your enough personal savings. It often involves long hours of preparation of say your business plan, finding the right location, getting your product ready which might involve sourcing suppliers and assemblers or writing your base software for extended periods, things that are not usually rushed unless of course you don’t care knocking a wall quickly along the way. Mind you, often time you’ve got to get the business registered with your relevant local authorities for operational and tax compliance. These processes could even last you a month or even more depending on your location, but well you can’t skip them unless you want to be shady in your business.

So what happens if you’re starting the business solely on a loan from a lender?...Immense pressure! First most lenders might give you a grace period of only one month before you start paying your monthly instalments. Remember, most businesses do not return substantial profit in their first 6 months, not because they’re not viable, but because of newness! The business early on is trying to build its clientele and refining its model for profitability as it moves through the waves of its industry. At this time, the business is trying to verify its unique value proposition in its market which involves a lot of acting on models, assessing and quickly adjusting so as to find the best fit. Even with the best idea, the market will usually point you in new angles that will demand changes and refining of the original planned model to acquire fit. The start-up is in essence building its pedigree as well, proving its worth before its market. These first months usually have lower sales and sometimes dry sale periods! So if you couple the stress of low sales and monthly loan payments, you get immense pressure that could easily make the entrepreneur to quickly burn out and want to throw in the towel.

Second, most entrepreneurs at start-up phase do not know who how to handle business finances, unless they have already garnered experience as successful serial entrepreneurs previously running successful ventures. Most new founders will easily throw cash at many things that would not return a dollar for the business, but just for the case of looking authentic… things like very fancy offices and furniture and hiring excess or unneeded labour! There are other things that also cause disorder like failure to separate business accounts from personal accounts. Many months down the road, the entrepreneur may fail to assign proper value for money spent on these things in the first months of business.

See, most of the times, in these first months, the business is burning cash on whatsoever is relevant but having limited cash returns on these dollars spent. So it is best if these dollars burnt are not from a loan, so as to reduce the immense pressure to pay, giving a chance to the entrepreneur to put focus on delivering value in their business that would later yield profit for the business and extend the runway for the business.

Does it mean that I should totally not borrow any money whatsoever when am starting my business?

While I have suggested a No above, it doesn’t mean that in all cases you totally don’t have to borrow a penny. In real life circumstances, of course you come short on adequate finances to start your business even when you have saved. But it would be good to at least have 75% of your start-up capital availed not as a loan from a financial institution. In this case, you will start your business with only a small loan that would be manageable even under immense start-up stress. It’s kinder like living with a small itching on your skin that takes a short time to heal, it never makes your heart beat up very fast!

In case you need to get a loan to push you forward, feel free to reach out to us for assistance direct on our phone number +256 760082017. You may even check out our loan products to see what could suit you .We also provide guidance on how to safely transfer money between Uganda and other countries.

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