Borrowing money to make money is not really a new idea and it is perfectly normal for successful entrepreneurs to borrow money and be in debt
By: Hitesh Khan/
Here are 4 reasons why successful entrepreneurs should borrow money and it is not just a fact of business life; but is often a shrewd choice to make money.
1. Start up costs have to be paid
A successful business has to borrow money because before you make money or a single sale can be made, there needs to be something to sell. Every business needs some form of investment before it can start trading. This could be as simple as a computer, a telephone and an internet connection. But most need more: stock, premises, marketing and something to pay the staff, even if it’s a sole trader.
The money for this could come from a personal loan taken out by the successful entrepreneurs or other flexible sources of finance such as credit cards. The money may even be borrowed from friends, family or effectively from the business owner themselves.
2. Working capital is needed to keep cash flowing
Typically, suppliers need to be paid before customers settle their debts. This puts continual pressure on cash flow. To keep this cycle moving, and to avoid running out of money, demands that a certain amount of money is available to the business at all times — working capital.
Over time, the business can finance working capital out of profits, but this only comes after a period of successful trading. If the business is growing quite fast, the capital required could always be ahead of the surplus generated from trade, meaning continual borrowing is needed.
3. Use the investment to make more than it costs to borrow money
This is one reason why many firms of all sizes continue to use credit, even when they’ve been trading for years. They use the funds to generate enough profits to more than cover the cost of borrowing.
Taking out credit, whether it’s a business loan, invoice finance or an overdraft, allows them to invest in more sales, creating more profit. Successful entrepreneurs spot opportunities in the market and borrow the funds they need to seize the moment.
Asking how much it costs to borrow money is often the wrong question if you want to make money.
The right question is: “What is the difference between how much you can make and how much it costs to borrow?”
4. Borrowing money reduces personal risk
It may seem odd for your business to borrow money when you have already got personal savings. But you saved that money for a reason — perhaps to fund children through education or provide for your retirement. Whatever that reason is, if you tie up that cash in your business, it’s not available for the original purpose. Taking out credit for your business offers a number of benefits and can improve your chances of commercial success.
Most financial institutions and non-traditional lenders disclose their minimum requirements for lending. If you meet a lender’s minimum qualifications and want to see estimated rates and terms, you can pre-qualify for financing. But pre-qualification is not the same as putting in an application for personal loans. You may pre-qualify for a loan and yet your loan application may be rejected once you put in a formal application – and the more formal personal loan applications you put out, the more the impact is on your credit score.
This is one good reason why you need to work with trusted Loan Specialists. Trusted Loan specialists are able to not only pre-qualify you with multiple lenders and compare rates and terms, they are also able to get you the best personal loans which has costs and payments that fit into your budget.
To lower the cost of borrowing, try to convince your lender to give you a better rate. You should negotiate with your lender and they may be willing to cut the interest rate to secure your business, and so the loan will cost you less. If you are uncomfortable about negotiating, you should engage the services of a loan specialist.
Loan specialists will not only be able to negotiate a better rate for you, they will also be able to help you compare the best personal loan offers from among the different ones given by the many banks. It also makes sense to engage loan specialists when you are trying to make money because their services are usually free.
Seeking sources of finance for startup or small business will be the biggest challenge for most successful entrepreneurs. Often the hardest part of starting a business is raising the money to get going. The entrepreneur might have a great idea and clear idea of how to turn it into a successful business. However, if sufficient finance can’t be raised, it is unlikely that the business will get off the ground.
It is good practice for the entrepreneur to speak to a loan consultant if there are constrains with restricted funds in growing the business. Loan consultants have very wide network with financial institutions and are very often more mindful of the different financial instruments which are available in the market out there. They can guide the businesses to the product which is the best fit for them.
Mr Paul Ho, chief mortgage consultant at iCompareLoan, said: “Most importantly, remember that you need to borrow when you don’t need the money, because when you really need it, no one will probably lend you any.”