Starting your own business is the dream of entrepreneurs all across the world. Many people have probably considered starting their own business but few have the actual guts to go out and do it. We know that there is a high failure rate for small businesses but there are also many that succeed.
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. 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 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 eFax Enterprise Services, 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. Where as 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.
Track All Your Accounts With Personal Capital
Personal Capital lets you see all of your accounts in one convenient place. Sign up now for free.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. On the other hand, if you don’t mind risking your own money, you could be able to turn a profit faster and expand a lot quicker by using your savings to fund your business.
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