Should You Borrow Money When Starting a Business

Is it wise to borrow money as capital when starting a business?  Or would you rather use your savings instead?

People differ in this respect.  There are those who say that it is better that you absorb whatever cost you incur at the beginning rather than lose the opportunity your business idea offers.

Others believe that the cost of borrowing might only use up whatever you make from your business.

In her article in Chron, The Advantages of Borrowing Money to Start a Business, Sherrie Scott said: “For many start-ups, borrowing money ensures the company has enough capital to open the doors and stay afloat until realizing a profit.”

PHOTO CREDIT: www.awakeningbusiness.com

She added: “Borrowed funds help pay business start-up costs... it benefit business owners because they do not have to rely on personal credit, savings and credit cards to fund new business purchases. Borrowed funds eliminate personal financial risks business owners take on when starting a new operation.”

On the other hand, there are those who believe otherwise.

Microfinance Opportunities, in its Financial Education Library page, presented a more balanced view by showing both sides of the coin.  In a comparative table, it showed the pros and cons of borrowing against using one’s own money in financing a business.

	TAKING A LOAN	USING YOUR OWN MONEY
ADVANTAGES	You can get access to more money than you might have in your savings (e.g. for growing your business)	You avoid the costs of taking a loan
	You get more money quickly than if you rely on saving little by little (e.g. when you need money for emergencies)	You are free to use your money as you wish
		You face less risk when you finance your business in smaller increments based on what you can afford to invest
		You avoid the obligations of a loan, including repayments with interest.
DISADVANTAGES	You must pay the costs of loans (e.g. interest, and processing fees)	You have limited access to needed capital
	You are responsible for repaying your loans on time, and face penalties for late payment	Your business grows more slowly
		You have limited ability to respond to investment opportunities

You cannot escape the fact that when you decide to start your own business, it will affect your personal life financially. 

If you used to work and all your needs were supported by your salary to pay the bills, you must have some kind of financial fall back so you can continue meeting your personal financial obligations.  You should have a reserve equivalent to at least six months of your salary so you won’t be pressured to rely from the cash you can squeeze out of your struggling business.

It reminds me of Ray Kroc, founder of McDonald's.  During the early years of the company, he never drew salaries or charge for his expenses, according to his authorized biography, Grinding It Out,The Making of McDonald’s. The income he made from a previous business sustained him while he was in the process of building up the company.

The ball is in your hands.  It’s up to you now to figure out what’s the most viable financial strategy to pursue to fulfill your dream of being financially independent in a business of your own.