Financing: which option do you consider better?
By BYOLA2871
@BYOLA2871 (4371)
South Africa
April 10, 2008 10:50am CST
My very close family friend intends to start an enterprise which I believe will do well given his business plan, all things being equal. He has at least 80% of the capital he requires for the business, he can do without the remaining 20% for a start. His bank was also willing to bankroll the business with a loan. He asked for my opinion, and I advised him to start with his own money and maybe go for the loan when there is a need for expansion. What do you consider the best option in financing this enterprise, his money or the bank loan?
2 responses
@echomonster (2225)
• Greenwood, Mississippi
10 Apr 08
I think it's natural to prefer to use your own money and not be beholden to creditors if that is possible -- it usually isn't for people starting a business or buying a home for the first time. That would be my preference, too, but I think a lot depends on your friend's overall financial situation. He needs to consider the worst case scenario: for instance, suppose the business fails and eats up all his resources unexpectedly quickly. Perhaps there will even be unexpected costs related to running the business that only become apparent later on. If this worst case scenario occurs, will he be able to absorb the blow, shut down the business, and move on to a new venture? If not, the loan may be the wisest choice. It's definitely foolish to stake your life on the success of any business or investment; there is plenty of risk involved even when the ideas are superb.
@BYOLA2871 (4371)
• South Africa
11 Apr 08
you really have a good point there but i was also thinking along the line that in case he fails what happens ?i felt its better to loose your own money than loosing the bank"s loan and they come around to claim your property which you have used for security now that will be worse dont you think so?
@echomonster (2225)
• Greenwood, Mississippi
11 Apr 08
Well, a lot depends on the details of the loan as well. I'm assuming that if he takes the loan he will be able to hold on to some of his existing savings. Then, if the business fails he'll still have this nest egg to fall back on. He'll be able to pay back the loan over time while he gets back on his feet financially.
@BYOLA2871 (4371)
• South Africa
8 Aug 08
thanks so much for this advise you have very good understanding of how loans work and i guess the first thing is for him tom also try to understand what his obligations will be just in case anything goes wromng thanks again.
@stephcjh (38473)
• United States
1 Aug 08
I think that he should start with his own money also. Banks charge high fees to lend you some money. I would see how it goes with his own money and then decide if he needs a little extra help from the bank.
@BYOLA2871 (4371)
• South Africa
8 Aug 08
you also have got some nice idea here because its better to loose your own money sometimes than loose someone else"s money and have them running and breathing hot von your neck.
