The second part of our Good Debt, Bad Debt series focuses on business loans. You can find part one on student loans here.
So you’ve just hit on a brilliant business idea and all you need is a few hundred thousands to make it work. This product or service is everything that the world has been waiting for, there’s no way you can fail. You decide to approach a bank for a loan to get your business going.
Business loans are also considered a good debt. You take out a business loan to start a business in the hopes that you’ll be able to pay it back from operational proceeds. There are many pros to having a business; you’re in charge of your future and, to a certain extent, have control over your income. You don’t report to anyone but your customers. There’s also a great chance of you being incredibly successful, especially if things take off as anticipated. We live in an age where starting your own business is much easier, especially if you have a laptop and internet access. You can set up a business in less than an hour – including opening a business account, thanks to internet banking. The rise of the tech world and open source programs makes creating apps, websites and reaching a global community much easier.
While starting a business might be easy, and seem worthwhile, sustaining it and ensuring profitability may take a while. You have to do a lot of research before launching your business. If the market is not favourable, or if you particular product is not in demand, you will have a problem – regardless of how ‘revolutionary’ you may think it is. The last thing you want to deal with after quitting your job to start your own business is failing to make enough money to pay back the bank loan and pay yourself. Of course, we’ve probably all read those Inc. articles that have warned us about the first five years and how you probably will struggle to be profitable, let alone make enough to sustain a comfortable lifestyle, yet most think they’re exempt from this rule. If you’re reckless with managing your cash flow, you’ll run into money problems and find yourself closing down. You have to think carefully about how you raise capital because the future is uncertain and unnecessary strain will derail you.
Whether you approach a bank or an institute that focuses on funding start-ups, or a group of people, having to pay back money is stressful and turns up the pressure to succeed. Of course there are other ways to try and raise money for your business without getting into debt.
- Bootstrapping: If you’ve been a diligent investor, and the capital you require can be covered by the money you have set aside, consider using that money instead of getting a bank loan. If you feel uncomfortable emptying your savings, then wait a little longer, and save some more money till you’re comfortable enough to take the leap. You’ll also have to be very careful about how you use money should you decide to go this route. We found an article with simple tips to help you out: 10 Bootstrapping Tips to Help Turn Your Idea Into a Reality
- VC Funding or Angel investors: Think along the lines of VC (venture capital) funding, or simply partnering up with a person you know and trust who also has the money to help you out. This does mean that you relinquish a bit of control and you’ll have to contend with differing views, unless the partners are silent. Even in case of the latter, big decisions you make will have to be run by them for approval. You can have a buy-out arrangement with your partner(s). Discuss the terms and conditions of ownership clearly, not forgetting what happens should your business fail. Have a look at AngelHub, The South African Investment Network and Investors Network for a network of possible funders. If you’re not in South Africa, look at VC4Africa.
- Crowd funding: A new way to raise capital without the strain of having to pay it back is to start a crowd funding campaign. However, simply posting your business on a site does not a successful campaign make. You need to work really hard to promote your campaign and ask as many people as possible to ‘spread the word’. You can get more information on how to start a successful crowdfunding campaign and sites to visit here: Kickstart Through Crowdfunding. For those outside SA, check out JumpStart Africa and Crowdfund Africa.
You can also start your business while working fulltime and work on it on weekends and in the evenings until it takes off and you can actually afford to resign and focus on it full time. This will take a lot of hard work. Starting and running a successful business fulltime is not easy so if you’re severely pressed for time, having a side hustle is a big challenge. However, this way you manage risk and can take the leap safely without worrying too much income flow.
We’d like to hear from you! Share other ways to raise capital, crowdfunding, VC capital firms or angel investors below. Remember, you never know who you could be helping.