You’d be hard-pressed to find a successful startup that was initially funded by small business loans. Billionaire Mark Cuban even went as far as to say that anyone who starts a business on a loan is a “moron” in 2013.
Starting a business is risky enough, so it just doesn’t make sense for the owner of a new business to give him or herself anything more to lose. A startup loan must be paid back despite the fact that there’s no guarantee a new business will make any money at all. And no matter how promising a startup may be, taking out a business loan with no foundation to pay it back will actually do far more harm than good.
LACK OF OPTIONS
Numerous banks are reportedly offering startup loans with 0% interest. This sounds tempting until you learn what is required for eligibility and just how tedious it is to apply for any loan from a bank.
Borrowers of bank loans must possess perfect credit scores and be able to provide collateral, even though most owners of new businesses do not own property or expensive equipment. The paperwork for bank loans is endless and you have to wait up approximately six months just to hear you’ve been rejected. The Small Business Administration (SBA) has a micro-loan program for startups but the qualifications are reportedly very strict and the average SBA micro-loan amounts to just $13,000.
Let’s say a startup is approved for a bank loan. Monthly payments would begin immediately after funds are received, which could be difficult considering the company hasn’t figured if it can consistently generate revenue for a decent period of time. Missing just one monthly payment could ruin your credit score, making it nearly impossible to secure another loan or rent work space in the future.
Most alternative business financing companies do not give loans to startups, so banks and the SBA are your only options.
ALREADY IN DEBT
Not only do startups lack the means to generate significant revenue, but there’s a good chance more money is going out of the business than coming in. New businesses typically spend their first two years or so in debt due to necessary expenses like new hires, equipment or real estate. Owners of new businesses don’t pay themselves at all during this time because they have so much debt to pay off.
This debt, however, comes from investments that were made to increase revenue, which is the only logical reason to go into debt in the first place. Startups cannot handle any more debt than they already have. Up until a business figures out how to sustain itself, regular expenses like bills push the business owner’s budget to the limit. The business is more concerned with covering monthly expenses during its first months of existence than it is with expansion.
And besides, if you use small business loans to pay your bills, what happens when there’s no more of it left? You have no idea if your business will even be alive by then, yet you’ve got to pay off a loan as well as the other expenses you’ve accrued because of that loan.
HARD WORK AND SACRIFICE
Arguably the most harmful outcome of starting a business on a loan is the trivialization of the real foundation of all businesses: Hard work. Any successful business owner will tell you that when a business fails, it is usually not because of a lack of funding but a lack of effort, a lack of sacrifice or commitment.
A business that is backed by endless personal funding cannot compete without strategy, dedication, and creativity. No amount of extra cash can substitute for the value of working hard enough to fund your business on your own. Business owners must be experts in their industry, and the quickest way to do that is to learn as much as you can about what works and what doesn’t.
Starting a business on a loan lets you skip this stage of the journey but you’ll only have an advantage until the business loan runs out. Your competitors, on the other hand, have spent years wracking their brains to come up with solutions for reoccurring, industry-related problems. They attained the confidence and intelligence required for success after digging themselves out of treacherous holes with very little capital to work with.
DOES THIS SOUND LIKE YOU?
Business owners who conquered adversity just to enter the battlefield are also more responsible when it comes to maintaining a tight budget and steady cash flow. Those who have had cash handed to them, on the other hand, are naturally more likely to spend too much money on unnecessary investments simply because when the money is there, it is very difficult not to use it.
This is why alternative business financing companies like United Capital Source only lend to business owners who can prove that they have a successful business and know how to manage money. A good credit score or the ability to provide collateral aren’t marks of a responsible business owner. You’d have to judge the business almost exclusively on performance, and that’s just what UCS does during the funding approval process. Upstanding bank statements are really the focal point of the underwriting process. If you have those but aren’t sure what to do next, call 855.933.8638 or visit the UCS website. Our funding experts will carefully assess your financial standing and find the right program for you!