Why You Shouldn’t Borrow To Start A Business


The billionaire entrepreneur Mark Cuban made headlines a few years ago by stating that only "morons" would take a loan to start a business. Cuban said that there are so many uncertainties facing a new business, and the only one certainty is that you will have to pay back the loan.  The bank is not going to care about your business, and their primary concern is that the loan is paid back.

His comments created much controversy.

Let's look at Cuban's comments. As always, the devil is in the detail of Mark Cuban’s comments. It is clear from the interview that Cuban was talking about bank loans to start an unproven business, as opposed to taking a loan to purchase an investment property or to purchase an established business.

His point was that starting an unconventional business, for example, launching a new product or a restaurant business, and borrowing money, is a terrible idea.  He is right! His point was that the business could easily fail, and many businesses starting off do indeed fail, and the only thing left would be the bank loan which you would still be obliged to repay. Again, he is right!

For example, if you start a restaurant business you will need significant capital. You will need an advance payment on the rent of the premises. You will need a deposit on the lease. You will need advance payment on fit-out works on the premises. You will need to buy stock. And this will likely be significant. You will also need money upfront to pay for staff, and other start-up costs of the business. All told, establishing a restaurant could cost anywhere from €50,000 to €500,000 depending on the restaurant and its location. Most people think that the best approach is to borrow to set up that business. However, a new restaurant (assuming it is not a franchise) is not a proven concept. It may work. Hopefully it does. But if it does not work, then you are left with a large loan for a few hundred thousand euro, and customers do you not like the restaurant.

Another example is a new product launch. If you devise a new product, you will incur significant costs on research and development, branding of the product, website design, purchase of stock and other start-up costs. If you take a loan to cover all of these cost, and no one buys the product, then what are you left with?  The answer is that you are left with the loan, a large amount of stock, a brand that you think looks nice but no one else does, and nothing else. Therefore, Cuban is right that it is not a good idea to take a loan to establish that type of business.

An alternative for that type of business is to seek finance in other ways, for example you should convince a friend or a third party to invest in the business and to advance funds for the establishment of the business. That also gives you the extra advantage that a third party has looked at your proposal, looked at your business plan, and decided that it is a viable proposal. In addition to that, there are many grant agencies and support agencies for new businesses, and you could tap those for funding also. Again, if they chose to give you money, you will have convinced them that your business is viable!

Of course you need money to start a new business, but you should not take bank finance to establish an unproven or unconventional business.

If you can’t afford to establish the business on the basis of your own means, or convince others to invest in the idea, then you should consider whether or not it is a good idea to start the business at all.

However, Cuban’s comments don’t apply to  purchasing an existing proven business, which already has an income stream, or which already has a successful product. His comments also don't apply to the purchase of real estate as an investment, as this is typically done by way of loan finance. Of course we accept that and finance can have a useful purpose, and it is an integral part of any commercial system. But we recommend that you look elsewhere for sources of finance if you are establishing an unproven business.

At Purity of Earth, we like new businesses and we like to give people the opportunity to start their own business. That is why we believe that starting essential oils business through the doTERRA network is a great idea. The best advantage is that you can start your own business without any requirement for initial capital. The start-up costs will be less than €100! And as well as that, the product is already proven, and you are not establishing a business with an unproven product. Also, doTERRA has a detailed distribution network, and it will distribute your product when customers actually purchase from you. Research and development is all dealt with by doTERRA, and you don't have to worry about developing new products or shaking up your product line. Also, a lot of the systems including website, branding, marketing, research and development, new product development and other aspects are already taken care of and you don’t need to worry about those.

You only need to worry about all the fun parts of starting your own business, which are sharing the product, explaining the product to others, generating publicity, and fun types of marketing. Once you can do those, and you are creative and you have ideas, then you have a great chance of making your business a huge success!

If you decide to start your own business, then someone like Mark Cuban is an excellent source of motivation. Cuban also made some interesting points about businesses that work based on effort, and most businesses do not fail due to lack of capital. Businesses fail for lack of brains, they fail for lack of effort, or not having the time to work smart.

And his main piece of advice, just go after it! Being an entrepreneur is all to you. If you enjoy doing something and think it could work - go after it. Worst case you have fun doing something you enjoy doing, and best case you’ll create a business that actually works.

 

Purity of Earth is dedicated to sharing nutritional, healthy living and essential oil products made by doTERRA. If you are interested in more information on these products, or the fantastic business opportunity of becoming a Wellness Advocate, please get in touch or email us at info@purityofearth.com!

If you read this far, well done and to say thanks, we are giving you a 10% discount on your first purchase with us. Simply enter the discount code NEWCUSTOMER at your checkout and your discount will automatically apply.