Debt Nation: No Life After Debt – How Debt Kills Your Business
All it takes to have a business idea is inspiration. However, turning that idea into an enterprise requires money. It takes money to get a business off the ground. You have to fund its needs and ensure that it has enough working capital for at least 6 months to support monthly operations.
For many
small business owners who are tight on cash or have limited access to capital,
getting a loan is the easy way out. However, by using a loan as a quick-fix
solution, you might end up committing business suicide.
- Nowhere To Run
When you
borrow money, you must repay it with interest. There are no ifs or buts about
it. The underlying principle of debt is pretty much clear-cut. In order to pay
off the debt, your business cash flow must be consistent and strong enough to
cover your monthly expenses and your loan.
The lender
does not care whether your business makes money or not. All the lender wants is
to get paid. The lender’s interest is to get the principle amount back plus the
agreed-upon interest on the loan.
If you
can’t pay off the loan, the lender will go after you. Plain and simple. Don’t
think that filing for bankruptcy will save you. The creditors will file for the
repayment of the loan. The repayment for creditors will take precedence over
any other claims on equity from you and the stockholders.
- More Assets
Will Be At Risk
An owner of
a construction company might be thinking of borrowing more money from a bank to
buy a new back-hoe loader or cement mixer. He is thinking that the estimated
stream of revenues from the projects on the pipeline should be enough to cover
the monthly amortization for the additional capital loan.
However,
what the owner does not know is that an additional loan would increase the risk
of the lender and this will necessitate a higher rate of interest. Furthermore,
the lender will be requiring additional collateral for the second loan.
What if the
projects on the pipeline do not materialize? What if they did but the projected
streams of revenue were not met? What if variable costs for the projects
significantly increased and severely affected the expected profit margins?
- Interest
Charges Will Only Get Higher
Interest
rates are influenced by macroeconomic factors such as inflation which are
beyond your control. Rates could also be affected by monetary policies that are
carried out by the Central Bank.
Even if you
are able to peg your interest rate, this arrangement will be on a limited-time
basis and still expose you to opportunity costs. Eventually, the rates will be
allowed to move and be subjected to macroeconomic conditions.
Just like
the casino, the bank will never lose. If you read the fine print of your loan
agreement, there will be a stipulation of an “adjustment” at the end of every
year. You can kiss yesterday – or more specifically, last year’s rate –
goodbye. The interest charged on your loan will only get higher.
Conclusion
There are
other ways to finance your business:
- Bootstrapping
– Dig into your savings and set aside money to fund your business.
If possible, find employment and use your salary to cover monthly shortfalls
until such time that your business becomes its own profit centre.
- Get Partners – Come up with
a business plan and design a presentation to invite trusted friends,
associates, or family to partner up in your business. As partners, they share
in the risks of your business. You are not obligated to pay them back for their
money.
Starting a
business is not easy. Sustaining its activities over the next few months will
even be harder. The last thing you want is to compound its difficulties by
having to deal with a business loan.
If you want
your business to grow and succeed, invest your own time and money into it.
Forget about getting a business loan.