WHY IT’S NOT ADVISED TO TAKE A LOAN TO START A BUSINESS.

When starting a business, there are a number of risks involved. The risk of the business failing, theft, losses, to mention but a few. In this day and age, it is easy to start however, there is the science of making it thrive that one needs to consider. Now as much as your anxiety pushes you to your limits, never take a loan to start a business and here is why.

1. Running business is a series of stages, now to be specific the starting stage which is the most delicate stage of every business. There is not a single business that started and thrived or became profitable within the first year. Reports show that of the total number of businesses created every year, less than 50% make it to the 6th year which means there is a big chunk of business that close within the first or second year of running which is less time to pay off a loan to completion.

Therefore taking a loan to start a business is a deadly risk because the odds that the business will survive are almost not there and yet once a loan is taken, it has to be paid.

2. The first 3 years of starting a business are for investment. Every single coin made is not profit, it is investment. As an entrepreneur don’t expect to make any profit in the first three years of starting a business. That time you are focused on being efficient and ensuring that your products and services are sufficient and reliable and the goal is to have every customer that visits, return.

It is also important to consider that as you start your business you want to establish presence in the market and attract customers from already existing business. this means that you get to do more, which also may require you to cut your process for most of the customers to be able to afford goods and services in your business.

3. Once a loan is taken, it has to be paid. whether the business was successful or not, it has to be paid at the agreed time. There might be grace periods provided by the loaner but that grace period is not even sufficient enough to make sales that will pay off that entire loan and finish it. In the mean time whatever you gave as security to take the loan is not coming back to you so basically that’s you making a triple loss.

Edwin Ssekito a graduate from Kyambogo University shares his story of how he was convinced by one of the bank agents to take a loan to start a business and he gave his father’s motorcycle as security. ” I had just graduated from campus and a bank agent started sending me messages about bank loans, I picked interest to know how it works. I took a loan of UGX 9Million and I opened a salon. I knew for sure that I was going to pay back that money in less than 2 years. Business started well and I was making about 80 – 100,000 per day. I invited all my classmates to get on it and they were supportive but after 5 months, I started making UGX 30,000 to UGX 50,000.”

Ssekito failed to pay the loan in the first year. He sold everything in the salon and paid off the loan otherwise his Father’s motorcycle was going.

“I took time to talk to my Father about it especially when the Bank was threatening to take my Father’s motorcycle, and he told me that loans are taken to boost a business not to start.” He adds.

4. All Businesses have profitable seasons and non profitable seasons including the fuel business. even though your business starts off with high profitability, there will come a season where the goods or services for the business are not that profitable. This will then affect the sales, hence affecting the loan.

Therefore, when starting a business, start it with the least amount of capital you may have and grow it. Only take a loan when you want to expand your business for instance if you have discovered new market and it would be profitable to serve customers, then you may take the loan to boost your business.