Borrowers Beware: 5 Things I Wish I’d Known Before Getting a Loan
My parents were my first business investors.
They offered to buy the supplies I needed for a cookie stand, but I had to help them plant trees in the garden. After some deliberation, I took them up on the offer. I lost $15 selling cookies and still had to work in the garden. Still, I couldn’t have learned valuable lessons like this without their help. Getting into debt is part of doing business–from cookie stands to huge tech startups.
Most people acquire that money through loans, a form of debt where you borrow money with an obligation to pay it back with interest by a certain time. Other people give up a percentage of equity in their company in exchange for some money to get the ball rolling.
Either way, it can be a little intimidating to have a few extra zeroes in your bank account. Here are a few things I wish I’d known before I grabbed that extra money to start my company:
1. Don’t Borrow From Family and Friends
Uncle Vernon has a substantial chunk of cash to his name, and he’s willing to lend some to you to get your business started. He won’t even charge interest, he says. Sound too good to be true? It probably is.
If your business ever folds, think of every Thanksgiving, Christmas, and family get-together where you’ll see him. It’s impossibly difficult to face a person you’ve let down on a professional, personal, and emotional level. Avoid it at all costs.
2. Make Sure You Really Need to Borrow
If “living the startup life” means buying a new MacBook and attending a cool conference in San Francisco, you may want to revisit the necessity of borrowing money for your startup. If you have everything you need to get started, don’t borrow money unnecessarily just to keep up with other companies or show off. It’ll come back to bite you.
3. Know How You’ll Pay It Back
When I borrowed money for the first time, I didn’t ask myself how I would pay it back. But when times got tough and I had to repay the entire sum back to the investor within eight months (plus 20 percent interest, of course), I learned that lesson fast.
When you take money out, make sure you have a clear plan of how you’re going to get that money back to the bank or investor. Make actionable, month-by-month reports on your progress to analyze what you could be doing better, and make sure your debt is the first thing paid each month.
4. Strings Are Always Attached
Inexperienced entrepreneurs are often excited about getting investments from investors. It feels like hitting the big time. However, they don’t always have your best interests in mind.
While there are “angel investors” who don’t seek a lot of money from your venture, most investors see you as a way to pad their wallet. Worse yet, equity investor sharks can prey on you, insisting on an absurd ROI within a short timeframe and crushing your business.
When you agree to do business with an investor, it’s not entirely up to you how the business will be run, either. When someone else’s money is in play, there might be a silent partner vetoing new equipment, new employees, or other costly measures. Vet any business partners carefully before taking them on.
5. Remember Your Reputation
Everyone has a credit score–it’s like the adult version of a report card. Having solid credit can open doors for you, but having poor credit can push you into a life of high-interest loans, debt, and financial uncertainty.
Your reputation, similar to your credit, is how others in the business community view you. Paying your bills on time not only boosts your credit score, but it also enhances your trustworthiness and credibility in others’ eyes.
It can be easy to go on a spending spree when you see all that startup cash in your bank account, but resist the urge. Take a step back from spending and plan where your money will go, and you’ll find yourself a step ahead of the competition.