On a live show on Bloomberg back in 2013, business mogul Mark Cuban said ‘Only morons start businesses on a loan’. This did spark an out-roar and so many discussions stemmed from it. Business owners and onlookers had something to say. Watch the video here.
The contrarian question here is, what important truths about business do very few people agree with you on? (Read Zero To One by Peter Thiel, to understand the concept of the contrarian question).
One of the important truths I believe in is that I can start a business without money; and that taking a loan to start a business isn’t a wise move.
Back to Cuban’s story,a question was asked on Quora regarding his remarks and the answers were long!
Most of the answers were in support of Cuban’s statement. Venturing into business is already a risk, taking up a loan is another risk. When you apply realistic thinking in this scenario, two things are possible.
One, the business will fail and therefore you will lose the loan money. You will have a ‘double’ debt to clear.
Secondly, the business will flourish and that will be to your advantage.
Looking in retrospect, it is a ‘hope for the best but expect the worst’ case.
So, why is borrowing money to start a business wrong?
The very first thing I will say is that you can’t take up a risk to support another risk, layman language.
Then there is the fact that loans come in handy when you are looking to grow a venture other than starting off. At the start, stability isn’t guaranteed, anything is possible. Failure is sometimes imminent.
Reasons why you shouldn’t take a loan to start a business.
What follows is an answer from Quora in response to the question
What do people think about Mark Cuban’s comment, “Only morons start a business on a loan?” How else would you propose one start a business with no capital?
1. Banks Are Your Only Option
Alternative business lenders do not offer startup loans. They base their decisions largely on income and the strength of the business’s performance, which mean nothing if the business hasn’t already proven successful. SBA loans are available for startups but the qualifications are reportedly very strict and applicants must wait several months for approval. Applicants for SBA Loans also must possess good track records with other businesses and high credit scores.
Banks, on the other hand, have been known to offer startup loans with low interest rates.
Such loans will usually only be approved exchange for collateral, or something the bank can sell to earn back the money it might lose. Payments would be another major issue since banks don’t offer customizable terms to prevent impact on cash flow. You would have to make regular, fixed payments, regardless of inevitable inconsistencies in revenue.
Missing just one of these payments will ruin your credit score, making it almost impossible to obtain another, far more essential loan in the future.
2. Business Loans Are For Growing Your Business, Not Getting By
If a startup experiences growth as a result of a loan, odds are, that growth is only temporary. Sure, you have enough money to pay your bills now, but what about in a few months? 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.
A small business loan is not meant to cover your initial expenses because it will be gone by the time you need even more money to keep your business going. If you use a loan to pay off initial expenses, you are doing nothing to grow your business.
If anything, you’re preventing your business from growing since you’ll have to dig into your funds once again to alleviate the financial instability that ensues.
3. An early Loan Diminishes The Importance Of Hard Work
As Mr. Cuban said, anyone who starts a business must “know your industry and your company better than anyone in the whole wide world.”
In other words, you shouldn’t be starting a business unless you have some sort of strategy that you believe will give you a significant advantage on your competition. You need to be able to offer something other businesses can’t, and if this idea is as good as you think it is, you won’t need money to earn success.
Mr. Cuban also said that failed business owners “don’t recognize how much work is involved.”
This implies that anything that could be acquired from a startup loan is nowhere near as valuable as the time and energy it takes to become an expert in a certain industry. To start a business, you must commit to work as long as you can to achieve the means to grow your business. It’s not extra funds but several years of steadily working towards a goal that ultimately prepares a business owner for greatness.
Are You Feeling Confused Right Now?
I know you are, and in case you are wondering how you will raise money to start your venture, find the necessary information here. Have a great day ahead.