Getting a Big Loan to Start a Business? Don’t!
Why it isn’t a smart idea
When most people think of starting a business for the first time, they think the immediate need is money, “capital” Wrong. Entrepreneurial mindset and business acumen is what you need, and you can start however small. No amount of money given to a broke person with unready mind will make a businessman out of him. Even well-educated people with no business experience have sometimes borrowed large amounts of money, only to end up heavily indebted with a business making perpetual losses. Most successful business people are those that started small or moderate and matured their entrepreneurial capabilities as the business grew.
Why Banks are reluctant to lend to startups
According to a Twaweza report, up to 55% of Ugandans who start businesses shut them down before the fifth year. This is generous because reliable statistics tend to show that up to 70% of businesses fail before their first anniversary. No sane banker would be attracted to lending a business with a 70% chance of failure within 12 months. They also seldom fulfil loan requirements, are prone simple shocks, lack credit history, and face cash flow volatility.
How do I raise startup capital?
- Begin with your own savings as the initial in capital, and run the business, however small, until the market demand for your product or service outstrips your ability to supply – then you can get your first loan to expand. If you have no savings, you have not yet developed the habits for business success – save first!
- If you are employed, maintain your current employment as you invest part of your salary to start your own business. This will ensure that you have a livelihood and as your business grows beyond certain level, you should plan to resign from employment and manage your business full time.
- For the first few years, reinvest most of the profit back into your startup business. The growth of your business will be constrained if you withdraw significant portions of the profits to cover personal expenditures. If you put your profits back into your business, you will be able to grow the business well. It is called organic business growth.
In conclusion
Don’t get a loan to start a business – start with your savings. Borrow appropriately if market demand warrants. For the employed, maintain your job as you start your business till the business is able to take care of you while growing – the quit. Reinvest the profits. May you be blessed in all you do.
Dr. Andrew Obara & Joseph Sserunjogi – FRIENDS Consult Limited