Is it smart to start a business on a loan?

[BeefCattle]

I'm talking like a 6 figure loan. Now of course, proper planning and research would be done, but everything is a risk and a potential 6 figure debt is crippling..

How else would someone secure funds for an idea that requires a heavy amount of capital?

 

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[magnificent]

I'm talking like a 6 figure loan. Now of course, proper planning and research would be done, but everything is a risk and a potential 6 figure debt is crippling..

How else would someone secure funds for an idea that requires a heavy amount of capital?

Absolutely not.

My parents started a biz and used my credit to buy materials from the Home Depot, etc. Turned out badly and still recovering from the debt.

 

[wade1mil]

I'm not giving you specifically or anyone else advice here because it's a personal decision, but...having done this with only 5-figures, I would advise myself, "Not unless you're willing and able to lose all the money." That could mean I can repay the loan with funds I do have or I'm ok with filing bankruptcy if it doesn't work out. The one caveat for me might be if I had started a similar business before.

 

[Dylan_91]

I had some friends who wanted to all take out large loans and start a retail business back in the day, really glad I decided against it.

 

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[BeefCattle]

As you guys can probably tell, I am trying to get into the Agriculture and Farming industry.

The thing that sucks is that its so capital intensive, its very hard for beginners to get into.

How does someone raise money for an idea that requires up to 6 figures or more

 

[Jon L]

I used to say 'absolutely not' because having money in the bank that you haven't earned causes all sorts of distortions in your thinking. However, I don't think that point of view applies when you have had a lot of experience in the business you're planning to start. For example:
If you grew up on a farm, saw all the various issues that came up, understood the finances, etc, etc, etc, then taking out a loan to get started actually makes sense. The only thing I would advise is that you ONLY spend money on stuff that was critical to your success. A shiny new iPhone isn't critical. A brand new tractor isn't critical (buy used), etc.

Compare that to a business where the owner is brand new to the business. They are making it up as they go along. They have no idea what is critical to the business, or not, so if they take out a loan, they're gonna waste a whole pile of cash. I met a guy once, that wanted to start an ultrasound baby-picture-taking business. Instead of buying an ultrasound machine for $5000 used, he took out an SBA loan for $50,000 to buy the state of the art version. What an idiot. The $5000 version took 'good-enough' pictures, and would have allowed him to actually make money. I lost track of him after that, but I've always wondered how long it took for him to pay off that loan.

 

[V8Bill]

It's obviously impossible for us to make that call. It depends on the business. We're obviously not talking about borrowing money to start a new business idea but if it's an established bona fide business that's already profitable and you're getting it at a reasonable valuation and you accept the level of risk then I don't see why not. Millions of businesses do that every day. And if you can see new opportunities (or have ideas) for the business to grow and if it's something you would really enjoy running and have the expertise and experience (or staff) to run the business then it may be valid to proceed with caution.

The question is too broad for a proper answer though. You need to find an accountant that you know and trust. But the only answer we can give you is "it depends".

Edit add: Obviously we assume you've read both of MJs books because this place is about opening our eyes to the benefits of building a fastlane-style business. Does this business meet the high standards of TMF and Unscripted business checklists?

 

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[Longinus]

As you guys can probably tell, I am trying to get into the Agriculture and Farming industry.

The thing that sucks is that its so capital intensive, its very hard for beginners to get into.

How does someone raise money for an idea that requires up to 6 figures or more

Would you get a loan to buy a Lambo to learn how to ride?

No, that would be stupid. You get an old rusty Honda, because you will make mistakes and maybe crash the car against a tree.

Same with business, you will probably fail the first time. And the second. Maybe also the third and fourth.

Some people think that it can't go wrong if they invest a fortune, they're wrong.

 

[Michał Kóska]

Maybe try to get into partnership with other farmers. Sometimes they have a lot of equipment that is parked, unused. Maybe they will be eager to lend you the machinery. I'm in the process of building my home- I needed some old bricks transported to my lot as a first layer for a driveway. I asked a local farmer if I could use his trailer for that and then he transported it to my lot with a tractor. It cost me really cheap- renting a small truck with operator would be a couple of times more expensive!

 

[TinyTim]

Depends on loads of factors. But generally my advice would be... no.

Got a loan a few years back and took big risk.. Backfired and I got myself into a spot of financial trouble. (Actually thankful for this period! Learn from your mistakes and all that jazz).

Sometimes it can even help to have less money available to your business. You will only invest in the vital components of you business, and won't be tempted to splash money around on 'shiny stuff'.

However, there are indeed times when getting a loan is the correct choice. If you know what you are doing and have experience in the industry, but need a financial boost to help you grow, or improve your operation... then proceed (with caution).

 

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[V8Bill]

...and of course never ever ask for specific financial advice from strangers on the internet.

 

[Thoelk]

Not saying that everything he says is true... But I like Cuban's opinion on this:

View: https://www.youtube.com/watch?v=KYneLGRTgy8


Granted, a farming business might not fall under a 'small business'... But why do you want to get into such a capital-intensive business to start with? You probably have some background etc. in farming?

 

[CareCPA]

How is the debt secured? Is it an unsecured loan, or will it be secured against the real-estate and non-recourse to you? What is the debt for? If it's inventory acquisition for agriculture, that's probably less risky than speculative investments, as they will at least have some residual value.
Same way if the debt is used for the real-estate. Yes, the R/E market may drop, but it won't drop to $0, so your risk would not be the full $100k.
I would use financing if it was an area I was experienced in. I would not use financing if I was trying out something new.

 

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[Lex DeVille]

Tough question. Lots of variables.

Your experience with business. Your experience in the industry. Your will to make it happen. What the market wants and needs. The amount of risk involved. What you're willing to lose if it doesn't work out. What you'll gain if it does. Your family and responsibilities.

There's more than one way to raise money, including investments by others and crowdfunding.

If a $100k loan made sense to me as what needed to happen to get my business to the next level, I'd probably do it. But I'm not you, and we're in different places and coming from different mindsets.

I'm not one to write off (speaking of write offs ..) a loan just because it's risky. Especially if I've done my research, and I'm taking a calculated risk rather than a stupid risk. But should you?

That depends on you.

 

[Gigi Rodgers]

I'm talking like a 6 figure loan. Now of course, proper planning and research would be done, but everything is a risk and a potential 6 figure debt is crippling..

How else would someone secure funds for an idea that requires a heavy amount of capital?

For Fuqs sake, don't do it.
Let's go into a story about crippling debt.

My parents have their own brick and mortar business.
They did something that NOT MANY brick and mortar business' do, and purchased the building.

This is kind of a BIG DEAL - because how many entrepreneurs think about BUYING the building vs. LEASING it.
99% that I know, do the latter.

The only bills they worry about, when it comes to that building, are the utilities - which come around to <$150/month.
That's my phone bill.

My parents have told me a few stories of local business owners that have signed a lease to a building or space.
The leasing officers were slick.
They always pushed for the business owners to have a contract with them longer than needed - saying that it would save you money in the long run, etc.

For various reasons (but usually to lack of sales), a lot of these businesses go Out of Business - but guess what?
They still have to pay the monthly rent to the leasing company.

These are people who signed 3, 5, 10 YEAR contracts with these leasing agencies - paying thousands of dollars per month, for a space they don't even inhabit anymore.

But the worst part?
No - bankruptcy will not get you out of this.

People have put up their houses, they live in their cars, they have 3 jobs - trying to make money any means possible - to pay off this "crippling" debt.
It will break your heart to watch a man in his 60s, living out of his car, tell you his story of how he got INTO this mess and how he has NO CLUE how to get out of it. He's tired. His confidence is shattered. And he just wants to live a normal life.

When you are "crippled" - mentally and morally - it's hard to THINK your way out of the situation.
And a 6-Figure debt will do that.

You say that you need to "secure funds for an idea that requires a heavy amount of capital"?
Think smaller.
Think the ABSOLUTE BASICS of what you need to REALLY get started and get those first customers (assuming it's a business vs. flipping houses, or something).
Then once you get those first customers, how can you add more value?
That's an upsell.
Then do it again.
They'll tell their friends, who will tell their friends, and next thing you know you have a thriving business that creates recurring revenue, in the 5-figures, monthly.

Even if it's not an e-comm business there are PLENTY of other business opportunities out there that DO NOT REQUIRE a 6-figure down payment. Find one of those and do THAT.

Do not cripple yourself over an idea that you "think" you need to do now - because that regret is one you will NEVER forgive yourself for.

 

[CareCPA]

For Fuqs sake, don't do it.
...
My parents have their own brick and mortar business.
They did something that NOT MANY brick and mortar business' do, and purchased the building.

This is kind of a BIG DEAL - because how many entrepreneurs think about BUYING the building vs. LEASING it.
99% that I know, do the latter.

The only bills they worry about, when it comes to that building, are the utilities - which come around to <$150/month.
That's my phone bill.

My parents have told me a few stories of local business owners that have signed a lease to a building or space.
The leasing officers were slick.
They always pushed for the business owners to have a contract with them longer than needed - saying that it would save you money in the long run, etc.

For various reasons (but usually to lack of sales), a lot of these businesses go Out of Business - but guess what?
They still have to pay the monthly rent to the leasing company.

These are people who signed 3, 5, 10 YEAR contracts with these leasing agencies - paying thousands of dollars per month, for a space they don't even inhabit anymore.
...

Did they pay cash for the building?

 

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[Andy Black]

What can you do to make a sale in the next 7 days? Do that?

 

[Gigi Rodgers]

Did they pay cash for the building?

Cash?...Check?...One of those.
It's fully paid off though.

 

[CareCPA]

Cash?...Check?...One of those.
It's fully paid off though.

Very impressive that they were able to start a retail business while owning the real estate with absolutely no financing.

To tie it in to the OP, I don't believe that every business can be started with no financing. I know many on this website are debt-averse, but there are times where it can grow your business exponentially if done correctly.
Looks like OP is in the beef industry. Beef cattle take 18 months (more or less) to reach maturity. If the OP does not finance, and can only raise the beef they can pay cash for, then it's going to take a long time to reinvest that cash in and grow.
Not everyone can be a middle-man or marketplace connector. At the end of the day, you still need the people who create the physical product to sell.

ETA: "Retail" in the generic sense in the first sentence, not necessarily buying and selling physical goods.

 

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[JAJT]

My parents started a biz and used my credit to buy materials from the Home Depot, etc. Turned out badly and still recovering from the debt.

Did they use your credit with your permission or behind your back?

Because I'd be calling a lawyer about options if I were you. To hell with family - if my own mother used my credit behind my back that would be the end of our relationship and I'd be treating it like identity theft.

 

[magnificent]

Did they use your credit with your permission or behind your back?

Because I'd be calling a lawyer about options if I were you. To hell with family - if my own mother used my credit behind my back that would be the end of our relationship and I'd be treating it like identity theft.

Hey,

It was definitely not behind my back and I was well aware of the consequences. We all mutually agreed and there was no ill-intent.

Foolish yes but learned a very important lesson.

Sent from my SM-N920T using Tapatalk

 

[Delmania]

How else would someone secure funds for an idea that requires a heavy amount of capital?

Your two best, and safest, options would be to seek some form of investment from private investors to get an SBA backed loan. The latter requires you to prove you have income, the former requires you to prove to investors you have a solid idea. A regular loan from a bank, a family member, or a friend is simply not worth the risk.

 

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[OldFaithful]

Is it smart to start a business on a loan???

If I recall correctly, MJ said that 90% of all new business startups will fail. My opinion is that the failure is OK. All things being equal, I'd rather not have a huge pile of debt to clean up when I do fail!

 

[Daniel Newton]

In my experience with small business loans I would say that it’s best not to take any sort of loan until your business is up and running and you have proven your business model.

Once you have proven the business model, you can start forecasting on future sales and then determine the impact that having more working capital can do for your business.

Best of luck!

 

[mentalic]

The correct answer to this question is another question:
What do you want the money for?
Not being familiar with the farming/agriculture industry enough, I guess that that I would try to rent equipment instead of buying, rent facilities instead of building (not sure what your options are though), secure contracts in advance (I guess that you have somehow done/planned this).
I wouldn't buy used equipment because of the risk involved and unexpected costs that might occur.

Trying to start the type of business that you want without any cash/loan might be impossible, but reducing the startup costs involved would probably be possible.

 

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