One of the options open to you, as a person who is setting up a new business enterprise, is that of financing the venture using a loan. Of course, this option becomes open if you can find a lender who is willing to give you money to put into a new business enterprise. As we all know, lenders tend to be very skeptical about new businesses. That is because the risk profile for new businesses tends to be poor. To put it bluntly, lenders know that they stand to lose their money, if they lend it to people who are setting up new businesses. Most of the lenders therefore prefer to give loans to established businesses, whose risk profiles tend to be better.
Still, if your credit score is good enough, and if your business proposal is one that is truly attractive, you may be lucky enough to find lenders who are willing to give you a loan to finance the new business. This is especially the case if you happen to have some good collateral that you can give to the lenders, for them to hold on to. Once the lenders have something they can sell if you are unable to meet your loan obligations, they will probably be willing to lend you money to finance whatever crazy business idea you may have.
At this point, even after finding a lender who is willing to give you a loan to establish a new business, the question that would arise is the one as to whether it is wise to finance a new business using a loan.
New business failure rates
In trying to answer the question as to whether it is wise to finance a new business using a loan, you need to be awake to the fact that many of the new businesses that are set up tend to fail – soon or later. In other words, the failure rates for new businesses tend to be very high. Some studies by, among others, the Small Business Administration (SBA) have shown that, in some industries, a good percentage of new enterprises – as high as 30 percent — don’t live to see their third birthdays! It gets even more disheartening in the longer-term: as figures from the US Bureau of Labor Statistics show that, in some industries, a truly huge percentage of new enterprises (as high as 50 percent) don’t live to see their fifth birthdays.
Of course, none of the people who set up new enterprises do so with the intention of failing. All the entrepreneurs who set up new businesses do so with dreams of success – dreams of making huge profits, expanding their ventures, taking their ventures into the stock market, turning into business moguls… you know, the works. But they end up with failure on their hands. Thus, as you set up your new venture, you have to keep it – somewhere at the back of your mind – that there is a good possibility that your new business venture will fail. It is a sad reality to face, but you just have to face it.
Having accepted the fact that there is a good possibility that your new business venture will fail, then you will find the answer to the question as to whether it is wise to finance a new business using a loan. So it becomes a matter of asking yourself whether you are willing to take a loan to finance a new business venture, knowing very well that the new business venture may fail.
Consequences of business failure
In trying to answer the question as to whether you should willingly take a loan to finance a new business venture, knowing very well that the new business venture may fail, you have to go a step further, and look at the potential consequences of business failure. Here, you will have to come to terms with this reality: that in case your new business venture fails (as many others do), you will probably be unable to meet your loan obligations. This failure to meet your loan obligations is likely to have many other consequences. For one, if your loan was secured with some sort of collateral, chances are that the collateral will have to be auctioned, to recover the money you were lent. And even after your property (the one that you gave as collateral for the loan) is sold, you will still encounter a situation where your credit score will take a deep plunge. Alternatively, you will have to declare bankruptcy – an action that will end up having lots of other negative consequences to your financial life. These are just some of the consequences of business failure, if the business happens to have been financed using a loan.
Entrepreneurship and risk
Even as we make all these considerations, we still have to keep it in mind that entrepreneurship is all about taking risks. And your success as an entrepreneur will depend on the extent to which you are ready to take risks. Against that background, it may be the case that you are ready to cope with the risk of borrowing money to finance a new business, only for the business to fail. And in that scenario, you can go ahead and take a loan to finance a new business. That is, of course, if you are also ready to cope with the consequences of failing to meet your loan obligations – which include having your collateral auctioned, having to declare bankruptcy and messing up with your credit score. If the allure of having a new business up and running is stronger than these considerations then, for you, financing a new business using a loan would probably be a wise step.
Alternatives to financing a new business using a loan
Finally, in trying to figure out whether it is wise to finance a new business using a loan, yet another consideration you have to make is as to (what) other alternatives are open to you, for business finance. This is where you have to look at an alternative like that of saving money over time, to get the required capital. Also open is the option of partnering with someone who has the necessary capital and giving the said partner a stake (equity) in the business, in exchange for the capital. So you have to ask yourself whether such alternative ways of financing your new business enterprise are actually open to you. And if such alternative ways of financing your new business enterprise are open to you, you need to ask yourself whether taking a business loan to finance the new enterprise is still the wisest thing to do – in spite of all those other open options.