Debt Nation: No Life After Debt – How Debt Kills Your Business

0
blank

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.

  1. 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.

About The Author