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Should you take a loan to start a business?

Should I take out a personal loan to finance my start up business?

A lot of people think to start a business, you need a lot of capital. And to get a large capital, a person has to make loans. In their minds, they will be able to run a business and generate profits using the loans they make and part of the profits will be used to pay off the loans.

Everything looks perfect on paper. But the reality is not as wonderful as it seems. Many people only think of a scenario of when their business makes a profit, but what if the business suffers a loss?

According to Investopedia, 50% of new businesses fail within the first 5 years of operation and another 70% fail within 10 years. In other words, out of 10 businesses, only 2 remain operational after the first 5 years.

According to Mark Cuban, only the unwise start a business in debt. Mark Cuban is the owner of the basketball club, Dallas Mavericks and an entrepreneur known to many through the Shark Tank show (a series of shows about entrepreneurs in the United States).

There is no guarantee that you will profit when you start a business. But if you are in debt, you are obligated to pay it. It is best to start a business, with no debt or loans.


Start with what you have

If you invest RM2,000 to start a business and then the business fails, you will only lose RM2,000 from your personal savings.

But if you start a business by making loans, you lose RM2,000 that you do not have. Not to mention the interest payments you will have to bear.


Start with a small capital

You have a dream to open up a restaurant. You continue to open a restaurant in a shop lot and the starting cost can reach up to tens of thousands of Ringgit. In addition, there are monthly fixed costs you will have to consider such as utility bills, rent and employee payments. If this business fails, it is quite difficult for you to bounce back.

Start your business with a small capital to avoid losses

Instead of going big right off the bat, you can start a small business first by opening a roadside stall. Your capital may not exceed RM5,000. From this small stall you can start getting loyal customers. As the number of customers increases, sales and profits will also increase, and only then you can start considering your next steps by opening a bigger store.

Another example is if you want to open a car wash service shop in a shop lot, maybe you can start by opening a car wash service using a canopy tent first.

Minimize risk and capital so you can try starting a business many times. If that fails, you can still afford to bounce back and start another business that might achieve success.

Lack of debt or making a loan to start a business

If you don’t have any record of running a business, it is actually quite difficult to get a business loan. People will usually take a personal loan where the interest rate is quite high.

Here, there is a risk of bankruptcy if you fail to pay off your debt because the debt is made in a personal name. There are more disadvantages if you are declared bankrupt.

You will also have less flexibility if you are in debt. You will be bound by a fixed commitment each month. To change strategy when you are bound by fixed commitment is quite difficult.

Risk of taking out a personal loan to start a business


When is the right time to apply for a business loan?

You should only consider a loan arrangement when your business is ready to grow, after you have made calculations and are confident you will be able to make more profit by applying for loans.

For instance, you want to open a new branch. From one restaurant to several new branches in different locations. You can already estimate how much sales you will get a day in a store, how much it costs monthly and how much profit you will get. Regular customers are also there, demand is increasing and your brand is well known. In this situation there is no issue should you decide to apply for a loan from the bank.

Aside from that, you can also apply for a loan to buy machines or tools that improve business processes, which increase productivity or production. From being able to produce 100 bottles of sambal to 1,000 bottles a day with the purchase of a new machine; the loan will help business growth. 

In conclusion, it is not wrong to start a business by borrowing or making a loan, but you need to think about the risks you will face, as the risk of business failure in its initial phase is quite high.

Think about how to start a business with minimum capital or no capital at all. For example, you can start a business as a takaful consultant with very low capital. You only need to pay registration and examination fees. You can read more information about takaful career here.

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