Should you use debt to fund your business?

 

When I first launched my cloud bookkeeping business two years, the first thing I did was write up a business plan with the hopes of securing a loan. Clearly I kinda dig numbers and spent a lot of time figuring out how much I actually needed without going over board. I came up with a modest figure of $5,000 and immediately started researching who was going to fund my next big idea.

Looking back on it, there were some key questions that I should have asked myself before searching for debt. And I probably would've ended up not needing one.

If you're thinking about getting a loan to fund your next fabulous launch or whipping out your credit card to buy that fancy camera equipment, definitely keep on reading!

Whether or not to use debt to fund your business is a big decision, especially if you feel like you can't get started because you don't have the money to do so. 

I found a program that funded young entrepreneurs and got my $5,000. Which was awesome! Not just to get the money, but what I learned along the way. But, there were definitely some drawbacks to it as well. 

Some of the Pros

  1. My business plan was critiqued several times by different professionals and it forced me to do more research.
  2. I had to present my plan to a board which showed me how to effectively communicate my service.
  3. I met a great group of people who have served as mentors to me, became clients or referred clients to me.

Some of the Cons

  1. I started my company in debt.
  2. I didn't learn how to bootstrap my company and find creative ways to do things for free.
  3. Did I mention I started my company in debt. In other words, with every dollar I made, a portion of that had to be paid back.

While there are definitely great benefits to getting a loan, in hindsight I should have waited to apply for a loan and probably wouldn't have ended up not needing one.

And my advice to anyone now is to not take out a loan or use your credit card unless you are absolutely certain that you need it. 

Why? Because it forces you to bootstrap, you aren't in debt and you'll have a better idea of what the money will be best used for.

So, if you're thinking about racking up some debt to fund your dream, ask yourself these three questions before you run out and get a loan and post it in the comments below.

  1. Do you have a clear plan for the money?
  2. Have you exhausted every other free option?
  3. Have you made your first dollar doing this new idea?

If you answer "No" to any of these questions, do yourself a favor and don't use debt.

Are you thinking about using a loan or credit card?  Let me know in the comments below.

Danetha Doe is the author of a Simple Guide to Accounting and Financial Strategy for New Entrepreneurs. She is the founder of Danetha Doe Consulting, a business development agency based in San Francisco. Connect with her on Twitter, @danethadoe.

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