At some point in life, everyone gets thoughts about starting their own business. And this COVID-19 pandemic has only accelerated these thoughts because of lots of unemployment. And to start your own business you need capital ( the money you need to start a business). For this capital, you may use your savings, or the money from an asset sale or borrow it for free ( loan from your parents, friends, and relatives) or you might take a loan for interest ( bank loan, gold loan loans from other financial institutions)
But out of all the options I want to discuss the last option. Because there are people who are not aware of why they should not start a business with money borrowed for interest.
First of all, money borrowed for interest means you are starting a business with a liability. That is, whether you make money from your business or not, you need to pay your loan EMI every month.
So, the loan capital brings you an extra expense called EMI before you launch your business.
Next comes your profit percentage calculation, these calculations are always assumed by people who start’s a business in enthusiasm with borrowed money.
In India, normally every business should have at least a net profit of 8% ( after all your expense ). But some business has less than 8% profit, those are volume-based business like metals, grains, etc
So when you do a business with loan capital, your profit % should be more than the interest rate of your borrowed capital.
Consider you are starting a business with a profit of 20%, in which 10% of your profit would be your general expense like your rent, staff salary and so on. The rest 10 % is all you have.
If you have borrowed your capital for more than 8%, you will start making losses from the first month. Because only 2 % will remain after paying loan interest if you have borrowed money at 8%. The remaining 2% will be either consumed for miscellaneous expenses or for operating expenses.
So at the end of the day, you have nothing left, and it will be hand to mouth scenario.
And in the course of time, the interest will eat your capital slowly leaving only debts for you. This is why people who are looking to start a new business should not borrow money to start.
You will also have the mental pressure to repay the loan if your business is not functioning as you expected. This pressure will act as a roadblock.
This is not the same scenario in western countries where the loan percentage is less than 5 %. So in western countries starting a business with a loan capital is viable because of the affordable interest rate.
Well in my view, to start a business you should never borrow money for interest, but to expand your existing business borrowing would be advised with the calculation of your net profit.
There are businesses that would go for a loan to expand their business, or bring in an investor to expand their operation. But to start a business it is always best to use your savings where you don’t have the risk of liability hanging on your head.
There are few exceptions when your business idea is too good and returns from the business are way more than the loan interest. Then borrowing money to start a business will be a viable option.
Kindly do your calculations before you plan to plunge into your venture, this article is not to demotivate any individual. It is to bring awareness about simple calculation which people tend to forget in enthusiasm when they start their own business.
Stay tuned…..
