Starting a business? Do you choose savings or a loan?
Most people starting their own business dream of ending up like Donald Trump, but unless the financing it carried out correctly in the first place, they have more chance of ending up like Donald Duck.
Deciding whether to use savings or borrow money to get started is a tough choice to make, especially if time is of the essence, as putting sufficient money away is not a quick process.
It is hardly surprising, therefore, that the majority of business owners decide to take out loans or finance the business some other way, rather than waiting until they have enough money in the bank.
These individuals usually budget to repay their loan commitments from the profits the business is expected to bring in – but what happens if the venture does not perform as well as planned?
In reality, few firms are particularly profitable to start with and it can take a number of years before they are truly able to say that they are financially secure.
This means that individuals who have no other source of income and no savings in the bank can be balanced on a knife edge and it can only take one particularly big bill to severely damage finances and put the business at risk.
Having loan payments to make in the early days can put added pressure on the business and make the difference between a success and a failure.
A large proportion of businesses that fail, do so in the first two years, with many falling by the wayside due to inaccurate on unrealistic financial assumptions.
A safer way to get going is to start small and upscale if demand warrants it. This not only reduces the overheads, but also means less finance is needed, making saving at least part of the funds a viable option.
Due to the risks associated with running a business on finance, some people attempt to save money before they launch into the market – a sensible option but one that requires sacrifices, commitment and patience.
There are many kinds of accounts available suitable for savings; click here for a range of examples and explanations of the different rates of interest and savings terms.
Waiting until there is sufficient money in the bank ensures that the business gets the best possible start and does not add the pressure of finance to a fledging company.
However, getting enough funds together without any form of financing can take a painfully long time, especially with the current economic climate and low interest rates.
In reality, the best way forward is a combination of the two approaches. Whilst it would be lovely not to have to borrow money to get started – it is also important not to miss the opportunity in the market and waiting for too long could mean someone else corners your customers.
On the flip side, putting too heavy a burden onto a newly formed business could doom it to failure from the start. Therefore, budgeting for money to continue to be set aside and keeping a financial buffer in the bank is a very good idea.
By keeping the start up costs as low as possible and the operation realistically sized, it should be possible to allow the business to grow slowly whilst still being able to set money side for upsizing should the need arise.