Should You Take Out a Loan to Start a Business?
Should You Take Out a Loan to Start a Business? Everyone considers establishing their own business at some time in their lives. Because of the high level of unemployment, the COVID-19 epidemic has only amplified these views. And you’ll need money to start your own business ( the money you need to start a business). You can utilize your savings, money from an asset sale, or free money (loan from your parents, friends, and relatives), or you can take out an interest-bearing loan ( bank loan, gold loan loans from other financial institutions).
But, of all the possibilities, I’d want to talk about the last one. Because some people are unaware of the dangers of starting a business with money borrowed at interest. To begin with, borrowing money for interest implies that you are establishing a business with responsibility. That is, whether or not you generate money from your business, you must pay your monthly loan EMI.
As a result, before you open your firm, the loan capital incurs an additional cost known as EMI.
“Whether you make a profit or not, you must pay your EMI every month.”
The next step is to calculate your profit %; these calculations are always assumed by those who start a business on a whim with borrowed funds.
However, these calculations are critical when starting a firm
In India, every company is required to make a net profit of at least 8%. ( after all your expense ). However, some businesses make less than 8% profit, such as volume-based businesses such as metals and grains. So, if you’re running a firm with borrowed money, your profit percentage should be higher than the interest rate.
Assume you’re beginning a firm with a 20% profit margin, with 10% of your profit going to general expenses like rent, employee salaries, and so on. The remaining 10% is all you have. If your business does not perform as predicted, you will be under mental duress to return the debt. This pressure will be a stumbling hurdle.
In western nations, where the loan proportion is less than 5%, the situation is different. As a result of the low-interest rate, starting a business with a loan capital is feasible in Western nations.
So, if you ask me, should I not take out a company loan?
Well, in my opinion, you should never borrow money for interest to start a business, but borrowing to expand an existing firm with the calculation of your net profit is a good idea. There are companies that might take out a loan or bring in an investor to help them grow their operations. However, if you want to establish a business, it’s always better to use your money because you won’t be liable.
There are a few exceptions, such as when your company concept is too good and the profits exceed the loan interest. Then taking out a loan to establish a business will be a possibility. Please make your calculations before you start your business; the purpose of this post is not to discourage anyone. Its purpose is to raise awareness of basic math, which many people overlook in their excitement to start their own business.
How can GETEZO help?
Getezo is one of India’s Largest Upcoming Online Marketplace, which you can access from anywhere in India. Just Log on to Getezo & search for a Loan after providing a location. The page takes you to a place where a list of Loan agents offers their services.
If you liked this article, check out our post- What is a Good Credit Score For Getting a Loan?