Is it a Good Idea to Start a Business with a Loan From a Bank?

Loans are frequently essential to a business’ success. The majority of startups that fail within the first three years lack enough capitalization. Many business owners overlook the ramp or the time it will take to break even and turn a profit. On the first day of operation, they anticipate customers to arrive and begin making purchases. That is not how things work. Over time, stores grow. A store will almost certainly operate at a loss for a year or longer as it develops a clientele, a reputation, relationships with customers, and other factors. A storefront lease is typically for a period of three to five years.

You have to cover the rent for that time period regardless of what else occurs. You must use savings to pay the rent if the store is not yet profitable. You’ll file for bankruptcy and be evicted if you can’t make the rent payment. Being well funded is the most important factor to take into account while beginning a business.

One of the first things you should ask yourself when thinking about starting a business is, “How long can I stay open without earning a profit?” You should reevaluate the plan if the response is less than three years. It’s not just about setting up shop, stocking it with goods, and purchasing a cash register, then loitering around all day with Muzak playing and clients pounding on the door. You must advertise the company in some way to let people know it exists and get them to visit and take a look around. These things are all expensive. The majority of entrepreneurs lack that kind of capital.

You must create a budget, follow it for at least three years, calculate your spending, figure out your breakeven point, and then create a variety of forecast models that illustrate what it would take for you to survive and prosper.

Taking out loans, especially from the Small Business Association, is a fantastic approach to ensure that the company can exist while it is ramping up. Small business loans are sums of money given by a financial institution and supported by the state. In other words, if you declare bankruptcy, you are not responsible for the full amount and the government covers the bad debt, meaning the bank suffers no loss. However, the government will still pursue you for the principal.

Together with my brother, I once opened “Olde Glory Cigar Parlor,” a registered S-Corp. We received SBA funding from a nearby bank for $400,000, and the neighborhood Chamber of Commerce assisted us in creating the financial plan (for free). I advise you to utilize all of your options when beginning a business. Even if you have an SBA loan, you are not required to use it; it can just wait in the wings for use when you need to grow, market, or get through a lean time.

The majority of retail businesses make the majority of their revenue during the Christmas season, yet they must remain open in July even when no one is making any purchases. A SBA loan could serve as a stopgap until the following holiday season.

However, you must enter this situation with no blinders on and exhaust your budget. You will fail right out of the gate if you don’t know what your costs will be. The “nut” of the monthly loan servicing will be one of the things on that budget. Additionally, you need to understand the distinction between your operating margin and gross margin. When I purchase a cigar for $5 and sell it for $10, my gross margin is $5. Every cigar I sell brings in $5. However, that does not account for expenses like rent, a loan, marketing, my income, taxes, and so forth. I must first “estimate” how many cigars I will sell and then update my projection as new information becomes available.

Generally speaking, you want to aim for a “Operating Margin” of about 35%, therefore you must create a projection that accounts for the additional 15% of costs needed to cover things like lighting and heating. This is the key to the “magic.” You can make up whatever forecast you like that will make you a millionaire in a week, but you already know it’s a lie. You must create a forecast that you firmly believe in and then work tirelessly to meet and surpass it. At the end of each month, you must assess how closely you adhered to the forecast and determine your actual operating margin because this will dictate how much you must sell over the ensuing 12, 18, and 36 months in order to not only be successful but also to maintain your business.

The “average income per square foot” normally realized by your type of store is the most frequently mentioned resource on the internet that can assist you with forecasting. Tiffany’s Jeweler earns $1000 per square foot, which is about 35 dollars more than the average retail store. The company with the most revenue per square foot is Apple Computer. If your projection runs out and deviates significantly from the average for your retail type, it is crap. However, this is merely “average.” It does not consider factors like the season, location, clients, and so on. Nothing will be more effective in the long run if you solely use it as a gauge.

You should only use it as a guide since, in the end, nothing will determine your success more accurately than your imagination, inventiveness, and enthusiasm for smart work—not simply hard effort.

A loan is a component of that.

Conclusion

However, if the loan has a reasonable interest rate, your company will generate enough money to pay off the debt in full, and YOU HAVE NO OTHER OPTIONS, then perhaps you might give it some thought.

But be cautious.

In order to guarantee their loan to you, banks typically require collateral, which is typically some form of property, like your house.

And if you don’t want to lose your house or whatever property it is, you have to be 100 percent convinced that it will work out and that you will be successful.

Before you borrow money from anyone, make sure you take all the necessary precautions and do everything you can to demonstrate that your business concept is successful.

Hint

Good…

• If you want to increase sales utilizing the loan
  
• If you are using it to expand to a desirable site, purchase additional equipment, or stock up on merchandise, you ALREADY have a business and sufficient cash flow to make regular repayments.

Bad…

• If you require it to launch a new firm from nothing, say $0
  
• If you spend the money on partying rather than providing your clients with higher-quality products and services.
• You have a fragile financial flow.

Good luck.